"Sink" and "Faucet": What lessons can blockchain games learn from past game economic models?

Original Author: Terry Chung

Original Title: 《Sinks & Faucets: Lessons on Designing Effective Virtual Game Economies》

Compiled by: Dong Yiming, Chain Catcher

To maintain economic balance in virtual games (i.e., the relative stability of core currency and items), it is essential to balance the rate of asset issuance with the rate of asset consumption/demand. That is:

Injected items ≈ Output items

To achieve this, there are several options to choose from:

1. Continuously drive new user growth, allowing old players to sell game items to new players.
2. Constantly introduce updates, more challenging, and resource-intensive endgame content for existing players to consume more resources.
3. The supply of coins and items (faucets) must be balanced with the quantity of coins and items used in the game (sinks, used in this article to describe a token consumption mechanism).

If this balance is mismanaged, player experience and retention rates will be affected.

Fortunately, virtual economies have existed for decades, and we can learn from many failed experiments and over-inflated games. I will introduce how previous virtual economies deployed "sinks" by combining the effectiveness and popularity/acceptance of different strategies with available data. We will also share some insights on new balancing tools emerging in P2E games that prioritize community and culture.

Table of Contents:

Part One: Lessons from Past Games

1. Public Facilities, Rare Collectibles, and Gambling
2. Trade Taxes and Land Taxes
3. Crafting
4. Staking, Converting Fast Cash into Consumables/Items
5. Unlocking More Game Content
6. Donations/Events

Part Two: Unique Strategies for Web3 Games

1. Using Game Iterations and Forks as Token "Sinks"
2. Community-Based Burning Mechanisms
3. Building and Holding Core Infrastructure

Conclusion: Under What Conditions Are "Sinks" Effective

Part One: Lessons from Past Games

Image Source: Reddit Poll

Solution 1: Public Facilities, Rare Collectibles, Gambling

Public Facilities

Charging players for the use of public goods by upgrading some minor in-game quality of life features can serve as token sinks. This can stimulate players' desire for achievement and their wish to avoid wasting unnecessary time.

For example:

• Flight paths in World of Warcraft and installing/upgrading for faster movement (in OSRS, Magic Carpet)
• Armor repairs (in OSRS and Elder Scrolls) significantly replicate real-life depreciation costs
• Paying to reset attributes/skills
• Buying and decorating houses (in Elder Scrolls, Final Fantasy)

These practical "sinks" are mostly seen as core content of the game—because paying taxes is so common that players no longer feel the pain; however, there are exceptions where excessive public facility taxes have led many players to quit (refer to the survey results in the image above).

In "Aion Classic," magic stones can enhance the functionality of weapons and armor. In PvE and PvP games, the most competitive characters need at least a +10 enhancement on armor and weapons, with the maximum enchantment value being +15. After each +10 failure, the weapon/armor resets to the +10 barrier. Players not only need to spend hundreds of hours farming stones, but they also often fail, requiring a significant amount of money for each attempt at magic.

"Phantasy Star Online 2" also uses the same upgrade mechanism. For the highest-level weapons (11 or 12-star weapons), the chance of upgrading to +10 in one go is 0.0014%, and each weapon needs to be upgraded to +10 three times to be fully upgraded.

Key Point: Grinding for tasks is not inherently evil. It cultivates a sense of mastery and progress, but it has its limits. The public facility tax that must be paid can be a useful gold sink, but tasks that require grinding and lack rewards will lead to player attrition.

Rare Collectibles

Regularly auctioning/selling rare collectibles for in-game currency. This can be achieved through luxury item seller NPCs, as part of special events, or as part of gambling games. This is driven by players' desire for social influence and ownership.

According to the survey we provided above, this is also one of the most beneficial methods for reserving community sinks.

Gambling

The expected value of gambling games is negative, but players often gamble for motivations such as obtaining rare decorations, acquiring extremely rare items, or simply for fun, such as in gacha games. Each time players participate in the game, they must pay native tokens. Because the expected return is negative, this is a token sink driven by players' desire for ownership.

Expected Value = Fun - EV (Monetary Loss) > EV (Monetary Gain)

For example:

• Squeal of Fortune/Treasure Hunter in RS3
• Kingdom of Loathing's Raffle House
• Player riots in Squeal of Fortune

From our survey, gambling is so far the most hated form of "sink." We speculate this is because many gambling sinks create pay-to-win channels.

Key Point: Do not create pay-to-win highways through gambling games. Rare collectibles should be embedded into the story and experience, or turned into a meme—people love to show off their wealth.

Solution 2: Taxes, Trade, and Land

Taxing auction houses, markets, P2P trading, and owning land/houses. This requires game creators to control the market.

Examples include:

• Auction house fees in MMO games (such as World of Warcraft, Diablo, and Jianghu). Notably, the auction house fees in Jianghu are used to purchase items in GE—this can be algorithmically adjusted to accommodate target items experiencing additional supply bursts. This tax also actively encourages player interaction, increasing the social depth of the game.
• Taxing idle resources. Lars Doucet outlined how Henry George's land value tax was applied to factories in EVE Online and how it successfully combated rampant factory speculation. "StarAtlas" will also adopt this approach.
• A 4.25% sales tax on the Axie Marketplace.

Image Source: https://www.eveonline.com/news/view/monthly-economic-report-october-2021

Over the past two years, trading taxes have been the largest drain on ISK currency. Broker fees (another type of market tax) follow closely behind, ranking third.

In the late game, trading becomes a major part of gameplay—most MMO games fall into this category—raising trading taxes effectively drains gold from the oldest and richest players' coffers to retain new players' holdings during the new game process.

The mechanism applied to Axie is illustrated below (click the image for details):

Key Point: In the "Most Hated Gold Sink" survey, taxes unfortunately ranked only third, but they are very effective. Taxing markets, trades, and idle resources can use the revenue for additional destruction or community-oriented activities. Perhaps new tax models can be experimented with from a wealth of optimal tax historical literature to find a more effective model than previously attempted.

Solution 3: Crafting

The forging system can serve both as items and as a currency consumer (sink). Players use lower-level items to create higher-level items/consumables/decorations, which consume component items and sometimes in-game currency. This is driven by players' desire for mastery of the game, curiosity about discovering new items and experiences, and creativity in finding new combinations.

• Guild Wars 2 has a forging mechanism that can serve as an item sink. Forging requires a large amount of materials, creating a bottomless pit for both lower-level and higher-level materials.
• Another example is the Construction skill in "Runescape." Upgrading buildings requires repeatedly building and then destroying furniture, thus consuming the materials used to create the furniture. Each plank of wood needed to make furniture costs money, and nails and other components must be crafted or purchased. In the presence of a taxable market, high trading is incentivized by skills that are difficult to train, which can become a powerful gold reservoir. Thick planks are among the most traded items on the exchange. It is worth noting that to reach the maximum level, at least 1 million GP investment is required (the fastest method requires 4 million), which is a significant investment for casual players.

Creating an item sink only works when the items being forged are not abundantly available on the market. If an item can be obtained through methods that save time and money compared to forging, and players can easily purchase raw materials and then sell the forged products for profit, this model may generate more gold.

Key Point: When used properly, the forging system can be a healthy source of progress and currency sinks while enhancing the game experience, background, and social elements.

Solution 4: Staking/Locking Exchange Rates

Staking is not unfamiliar in the crypto space, but similar solutions exist in web2 games.

"Managing Miscellania" is a mini-game in "Runescape." Players can deposit up to 5 - 7.5 million gold coins (depending on task completion) in a treasury. Up to $50,000 is withdrawn daily to pay "workers" for obtaining resources, which are then reclaimed by players. The rewards are often lucrative, but the resources are widely needed and consumed skills. Players deposit gold coins into the treasury because they desire achievement and skill improvement.

"Managing Miscellania" effectively locks and destroys millions of tokens and converts them into slower-paced items or consumables needed for game progress.

Key Point: Convert fast currency into slow items or consumables.

Solution 5: Unlocking More Game Content

Instead of requiring players to purchase additional game content, memberships, and DLCs (downloadable content), they can be sold to players for a large amount of in-game currency. The quality of content and player experience will be key drivers affecting players' desires for unpredictability (curiosity) and achievement (completing all game content).

Runescape Bonds grant players 14 days of membership but can also be purchased from another player for 4.7 million GP. The statutory purchase cost for one month is $11. An hour before writing this article (Sunday night at 9 PM EST), 553 bonds were purchased on the Grand Exchange, totaling about 2.5 billion GP. Proportionally, this means bonds account for about 1.2% of daily GP trading volume. 2.5 billion GP is also equivalent to earning gold using the highest method in-game for 250 hours. You can check real-time data here.

If Jagex were to sell bonds for GP, it would create a very healthy gold sink.

Key Point: Transform "pay-to-play" into "pay-to-skill/play for fun." Given that web3 games do not profit from purchasing games from producers, this method is very effective.

Solution 6: Donations/Events

According to Reddit polls and my personal experience, the most community-friendly gold sinks are donations and events. Encouraging players to burn and destroy gold out of goodwill, or donating gold by granting players meaningful or socially impactful rare collectibles and titles.

Examples include:

• The 2009 Bailout Event in "Gaiaonline." To coincide with the renovation of NPC shops, Gaia timely held the Emergency Aid 2009 event, where each shop owed "GRS" taxes, and players needed to donate to each shop to ensure its survival in the update. One criticism of this event is that regardless of the total donation amount, the outcome was predetermined, and those who donated large amounts did not receive additional benefits.

In cryptocurrency, if a certain threshold is not met, it is easy to automatically refund funds, so game developers find it easier to create updates that rely on funding as community activities.

• The Well of Goodwill in RS3 accepts donations of items and gold. Jagex, the parent company of "Runescape," matches GP donations with pounds and donates them to charity.

A player donates to the Well

Those who donate above a certain amount to the Well of Goodwill receive rare titles—perhaps the rarest and most coveted items in the game.

The well allows those without bank accounts or who cannot remit to donate in a low-cost manner (by accepting in-game currency), fostering collaboration between the game and community. Those who donate over 5 billion GP (an astonishing number for those who have never played the game) are awarded the title of "Billionaire."

Despite the popularity of this sink, it will not return to the game.

In line with the Reddit survey results, I personally really enjoy this type of sink. It fosters a community experience intertwined with legend: for "Gaia," it updated the game. For "Runescape," it provided players with capital to show off and added fun and achievement elements to donations and gold burning.

Key Point: Directly integrate gold sinks into community activities/knowledge. Create interesting experiences around gold pools and grant players/guilds significant bragging rights based on the amount of gold consumed.

Part Two: Unique Strategies for Web3 Games

In the previous section, we explored balancing solutions from traditional games. However, Web3 games offer more opportunities to create organic sinks and balancing mechanisms. This includes seed mods and forks into community-led sinks. Both rely on the open-source, interoperable, and community-first nature of web3 games, applicable only to truly decentralized communities and culture-first single-player games.

Solution 1: Using Game Iterations and Forks as Token "Sinks"

"Modded (iterated) versions of games always push gameplay into new realms and new types. In fact, some of the most popular games are created inspired by other games."

------ From 《Power to the Players: Open Source》。

For example, "Day Z" was originally a mod for "Arma 2." Dean Hall took the strengths of "Arma 2" and transformed it into a survival game with zombies. Soon, "DayZ" spawned many derivative games, including the mod "DayZ: Battle Royale" developed by the then-unknown "Unknown Player." This not only popularized the battle royale genre but also later evolved into "PUBG," becoming one of the most popular video games in history.

Another famous mod: Dota originated as a mod for "Warcraft 3," and its popularity helped boost the MOBA genre.

Because Web3 games can profit from secondary sales and taxes on core infrastructure, they have strong incentives to create new mods and player creations, thus generating organic demand for their ecosystem tokens. This is a natural counteraction to the innovator's dilemma, capable of creating continuously evolving games that lead to more enduring gameplay.

This is the strategy taken by Sandbox, Aavegotchi, and Sky Mavis after opening the Axis SDK and allowing developers to build on Ronin. In all three cases, the core teams have established infrastructure, ample liquidity, and an initial ownership base. Next, they encourage ecosystem builders to create plugins and sub-games on their platforms and earn revenue in the form of activity taxes. This is why Axie positions itself as a "nation."

"You can think of Axie as a country with a physical economy, where AXS token holders are the government receiving taxes. The game's inventors/builders—Sky Mavis hold 20% of all AXS tokens." --- From the Axie whitepaper.

The Aavegotchi mini-games are community-developed games that can only be played by those who own Aavegotchi tokens. Because each game is different, Aavegotchis with different characteristics are beneficial for different games.

Sometimes, in certain mini-games, Aavegotchis with lower base rarity scores perform better than those with higher rarity scores, creating demand for various Aavegotchis. Playing mini-games within a designated time period can also earn you XP, making you more likely to win leaderboard GHST rewards. According to the Aavegotchi wiki:

"To ensure fairness in the game, each mini-game will use different Aavegotchi characteristics. For example, a super combative Aavegotchi may excel in the Aavegotchi Fighting Club but may not be suitable for the cake-baking mini-game."

Sushivader is a mini-game of Aavegotchi.

But to use the above strategies, games must decentralize while incentivizing platform talent building (see the Roblox DevEx program). They must also allow game creators and ecosystem developers to take a cut from the economies they create (through royalties and contribution-related rewards) while operating as a DAO.

Key Point: Allow community developers and game designers to create experiences that drive organic demand for tokens and infrastructure.

Solution 2: Community-Based Burning Mechanisms

According to Jon Huang's estimates, about 98% of Axie's DAU are scholars. Considering Axie's DAU is 2 million, and the largest guild YGG has 10,000 scholars—we estimate the number of scholars in the guild may not exceed 5-10%. If this number increases, also considering managers, introducing a burning mechanism at the scholar level becomes very important.

One example of this mechanism is fairly converting the SLP held by scholars (assumed to be highly liquid) to SLP held by the guild or protocol. This may occur in guild-level games where scholars can stake/exchange SLP to obtain better cards or items, although the profitability of this strategy for the guild is uncertain. Additionally, the Axie treasury can distribute AXS rewards to guilds executing community support initiatives, including community-led burning mechanisms.

An existing community burning mechanism example is YGG's commitment to use its SLP treasury for staking in RON or previously fully using its SLP to breed new Axies.

Key Point: Establish a "long-termism culture" to support the community.

Solution 3: Build and Hold Core Infrastructure and Charge Fees

This is an extension of the first part on taxes.

P2E games can build, manage, and profit by holding core infrastructure and taxing its use. Sky Mavis owns its own chain, market, and DEX (Katana), charging gas fees (RON) and market fees (4.25% of ETH) to those using the protocol. These protocols generate fees, which can then be used for buybacks and burns, or taxes can be directly burned.

For P2E game studios, developing protocol infrastructure is much easier than building game ecosystems (strategy 2). If the P2E economy is a protocol, the broader the protocol it covers, the greater the value it generates.

But in the long run, high adoption rates in an open-source project may be unsustainable. Only when P2E games provide the highest quality core infrastructure and incentivize the best operators to contribute to their infrastructure (rather than building for themselves) can they prove that key infrastructure is a token sink or demonstrate that they are a significant revenue source for treasury operations.

Key Point: Create the best core infrastructure and charge fees as sink recovery, or use the protocol for buybacks and burns.

Conclusion

In virtual economies, the balance of faucets and sinks is a necessary condition for maintaining healthy price equilibrium. However, sinks do not guarantee that any game token can regain its peak value. In fact, sinks only work when people use them.

The advantage of Web2 games is that they are closed economies; once funds enter, it is difficult for them to leave (the exchange between in-game currency and dollars is not easy, transparent, or legal). This means they can also benefit from a greater degree of separation between players' perceptions of currency and fiat currency. This means players:

1. Have no choice but to spend money within the platform/game.
2. Are unlikely to perform high-level mathematical calculations for returns when engaging in any activity.
3. Are more likely to spend currency on random things or for fun.

P2E games, however, cannot enjoy these benefits. To encourage players to participate in sinks in an environment where the USD value of deposits and withdrawals is very apparent, it must provide additional currency for burning (which will further increase supply) or other forms of additional utility.

To encourage players to enter "sinks" in an environment where the USD value of inputs and outputs is very transparent, it must provide additional currency for burning (further increasing supply) or other forms of additional utility.

Therefore, in an open economy, sinks are only effective when the following equation holds:

Incentives + Additional Benefits of Using Sinks > Costs of Using Sinks

The factors determining the effectiveness of sinks are whether people will use them, and they will only use them when they see value in them.

"Ultimately, people need to consume for entertainment, status, and convenience, and even more so to make the economy work permanently." ------ Jihoz