BLOG, Reshaping the Economic Model of Crypto Games with DeFi

Written by: Kydo, Llama & Aiko, Folius Ventures

Compiled by: TechFlow

Introduction

The success of all economies relies on a balanced and sustainable monetary system. However, game economies have yet to find equilibrium between their currency supply and demand— in-game currencies exhibit extreme volatility, posing significant challenges for all stakeholders.

The price of in-game currencies can be abstracted as a game between burning and minting, where burning is driven by consumption in the game, such as upgrades, progression, breeding, and trading; minting is driven by activities in the game, such as quests and PvP. While most attention is focused on adjusting the complex balance between burning (demand generation) and minting (supply generation), few consider the financial nature of these systems.

Aiko and I will introduce several rigorously tested DeFi primitives in this article to fill this gap. At the same time, we will embed them in a player-friendly manner.

The Dilemma of Cryptocurrency Games

Old monetization models are unsustainable. Miners constantly shift from one game to another, creating false booms and leaving behind turmoil.

Even with the Ronin public chain and the new Axie game, the price of RON has halved, and SLP has not seen any upward momentum. Consequently, scholars have had to leave this overexploited land and migrate elsewhere, such as Avalanche and Polygon.

Pegaxy, which nearly dominated the Philippine market with 50,000 DAU, also could not sustain itself. As more players joined, VIS (Pegaxy's token) entered a vicious cycle of inflation, and its price hit rock bottom again within two weeks, prompting some large guilds to liquidate their Pegaxy NFTs.

Pegaxy Holder Data Statistics

$VIS Price Performance

To alleviate massive token depreciation, some game teams have implemented preventive measures, but the results have been mediocre. These inefficient measures are often cumbersome designs for developers.

For example, Thetan Arena is a highly playable MOBA game that previously succeeded in the mobile app market, boasting eight million players and being one of the most popular cryptocurrency games.

It currently has a valuation of $151 million. Although it has implemented gold sinks (an economic process through which in-game currency or any item that can be valued is removed from the game) and combat restrictions to reduce inflation, it cannot prevent scholars from continuously squeezing $THC and cashing out entirely.

The in-game currency $THC has been slowly declining since its launch, dropping nearly 99% over four months, and coupled with a lack of liquidity in the NFT market, $THC quickly entered a death spiral of pricing.

$THC Price Performance

The financialization of the gaming experience has led to systemic backlash. A significant focus and asset appreciation attract new players to purchase assets and try the game, or treat it as an investment opportunity, earning tokens in return. Regardless of their motivations, when the token price suddenly drops, it triggers a mass price rebound as these players rush to exit the system.

Strong playability is essential, but we also need certain safeguards to curb this systemic backlash. Most developers still attempt to follow traditional methods, using gold sinks to address inflation issues.

Why not consider some rigorously tested financial infrastructure and embed it into a player-friendly version?

Current Innovations

First, I would like to provide some background information on DeFi and innovations in cryptocurrency games. However, if you are already familiar with AMM, Bancor V3, and ve(3,3) in cryptocurrency games, feel free to skip to the next section.

Commodity AMM of Crypto Raiders

Crypto Raiders is a P2E game launched last year on the Polygon network. The most interesting additional feature of Crypto Raiders is its external AMM. This AMM serves as the most basic commodity trading platform in the game. At a higher level, this design attempts to eliminate counterparties in any trade.

By relying on existing decentralized exchanges, we can create a high liquidity instant settlement trading market for assets in the game, which did not exist in past games. WoW or Runescape required someone on the other side of the trade. In cryptocurrency, with automated market makers, you no longer need that. ------ Nat Eliason

With AMM (automated market maker), the protocol can easily guide initial liquidity and earn additional trading fees. Since the protocol can control both sides of the liquidity, initializing liquidity pools becomes straightforward, and predicting future price trends is also within reach (more on this later). As the majority liquidity owner of these liquidity pools, the protocol can also earn additional trading fees from user activities.

Bancor V3

Bancor was launched in mid-2017 as the first AMM project and is one of the least conspicuous projects in the entire DeFi space. Unlike most AMMs that can create pools between any tokens, Bancor requires all tokens to be paired with BNT (Bancor's token).

2022 Bancor Website

The name "Bancor" comes from the monetary concept of the famous economist John Maynard Keynes, known as the "International Clearing Union (ICU)"—the fundamental economic unit for all settlements and valuations. Although the original idea was not realized in the Ethereum world, the parallel relationship between Bancor's vision and game economies is evident.

In games, the basic economic unit is determined by the protocol. In Axie, it is $SLP, and in Crypto Raiders, it is $AURUM. Therefore, perhaps Bancor's design philosophy is most applicable to the economy within games.

In the next two sections, I will introduce some of Bancor's latest innovations: Omnipool AMM and Bancor Vortex.

Omnipool AMM

Bancor's Omnipool AMM allows trading against a central liquidity pool. In traditional AMM models, all liquidity is decentralized, so there is no common numeraire. In the example below, token A has deep liquidity against token X but only moderate liquidity against tokens B and C (an intuitive example: token X = ETH, token A = any token, token B = USDC, token C = USDT), this design introduces composability but increases complexity, leading to dispersed liquidity across different pairs.

Bancor's Omnipool model uses only one numeraire. All liquidity is paired with BNT (Bancor's token). In this design, all liquidity in the numeraire token is concentrated together, benefiting the trading experience across all trading pairs.

Vortex

Vortex is an innovation that enables efficient token buybacks.

A common way for protocols to support token prices is through token buybacks. The protocol uses a portion of its revenue to buy back tokens on the open market. The repurchased tokens are typically distributed to token holders or burned.

Bancor's Vortex system aims to buy back tokens at a discount. To achieve this feat, Bancor offers liquidity staking to users. After staking BNT into the system, stakers can exchange their vBNT (staked BNT) for BNT through the Vortex system.

Currently, Vortex can be viewed as an AMM pair between BNT and vBNT. If people want liquidity from their stake, they can trade out through Vortex. As more people sell their vBNT for BNT, the price of vBNT will decrease relative to the price of BNT. Currently, in Vortex, 1 vBNT can be exchanged for 0.6 BNT. For sellers of vBNT, to redeem their staked BNT, they can only buy back their vBNT later.

vBNT Staking and Vortex Workflow

Since both vBNT and BNT represent 1 BNT, the protocol can buy vBNT at a discount and then burn it, effectively removing BNT from supply. For example, if the protocol earns $1 million annually, and the price of BNT is $1, in a traditional buyback model, Bancor can only take 1 million BNT out of circulation. With Vortex, it can take 1.7 million (1/0.6) BNT out of circulation, increasing by 67%.

Vote-escrow and ve(3,3)

The term ve(3,3) was proposed by Andre Cronje, aiming to combine Curve's vote-escrow (ve) model with Olympus's (3,3) to ensure that the power of voters is never diluted.

Curve DAO Governance Page

In the traditional ve model, token holders can lock their CRV (Curve's native token) in exchange for veCRV. veCRV is the governance token of Curve DAO, used to determine future liquidity rewards. The exchange rate between veCRV and CRV is a time-based linear function. When the lock-up period is 4 years, 1 CRV = 1 veCRV; when the lock-up period is 1 year, 1 CRV = 0.25 veCRV.

veCRV holders earn platform trading fees from the protocol. For example, if on a given day, Curve generates $1 million in trading fees for the protocol, and there is a supply of 1 million veCRV tokens, each holder of 1 veCRV will receive $1 in return. (Actual numbers and percentages may vary).

veCRV is essentially non-transferable. However, people have found ways to circumvent this design through different wrapping mechanisms. AC's ve(3,3) design transfers tokens into an NFT after locking, allowing people to trade it as a less liquid NFT in the secondary market rather than a liquid token. While AC has highly praised the future financialization benefits of this design, the practice of locking tokens into NFTs is even more exciting in the gaming space.

Avengers Assemble!

Now, how do we respond to these innovations?

I propose adopting a "BLOG" design for cryptocurrency games, where the four letters stand for Buybacks, Locking, Omnipool, and Governance.

Flowchart of all interactions within BLOG

In this design, my goals are:

1) Enhance the trading experience through an inclusive AMM,

2) Reduce token sell pressure through long-term locking,

3) Increase the utility of locked tokens through governance control,

4) Increase token purchases through effective buybacks.

For gamers, this design is very simple and easy to understand:

1. Players trade items with instant settlement under the same user interface;

2. Players lock their GOLD in the bank (locking contract) to earn veGOLD and passive income, just like depositing in a bank;

3. Players use their veGOLD to purchase honor titles (govNFT) (after meeting some non-financial requirements) to gain decorative items (and/or status boosts) and governance power;

4. Players can (through Vortex) sell their veGOLD (locked GOLD) for GOLD.

Before I continue, I must emphasize that I am merely combining existing designs and standing on the shoulders of giants. Thanks to all DeFi and cryptocurrency game innovators; now let’s proceed.

Trading Experience

Not all items in games should be NFTs. In traditional cryptocurrency game projects, the most important assets are NFTs. For example, Axie Infinity's Axies, Pegaxy's Pega, Crabada's Crab, and Crypto Raider's Raiders.

However, not everything in a game should be an NFT (ERC721). For instance, let’s imagine a traditional fighting RPG game. In this simple game, players have a sword and a shield. Each item has its unique attributes. Therefore, they should belong to NFTs because they are non-fungible. Your sword is not my sword. There’s no issue here.

When players venture into the wild to fight monsters, they collect various drops. These drops can be meat, bones, gems, etc. These items are no longer unique; they are interchangeable. All meat is equal, all gems are equal, and so on.

Some MMORPG players might think, "But what about different gems? They are not interchangeable." Indeed, strength gems and speed gems are different. However, you can design strength gems as ERC20 and speed gems as another ERC20.

They cannot replace each other, but they can be interchangeable within themselves—my strength gem equals your strength gem (interchangeable internally), while my speed gem is not my strength gem (not interchangeable). The same concept can be extended to the levels of gems.

Thinking about cryptocurrency games from the perspective of "fungible assets," we can utilize Bancor's Omnipool AMM to facilitate a better trading experience. From now on, I will refer to these fungible items as "commodities." In traditional games and current cryptocurrency games, all items are traded through order books. The order book is where buyers and sellers post prices for the goods they want to sell or buy.

For low liquidity commodities, this may not be the best method. If I want to sell some gems I collected a few days ago, I have to post a sell order on the order book and wait an unknown amount of time until someone else places an order.

With the Omnipool AMM, I can trade any number of gems instantly, just like I usually sell my $MATIC or $ETH on Uniswap. If I am a buyer wanting to purchase some commodities, the same principle applies. Omnipool eliminates the need for a counterparty in all trades, enhancing the trading experience for commodities in the game.

With Omnipool, the protocol can also exert finer control over commodity prices. In the order book model, liquidity consists of different players buying and selling these commodities. When we switch to the Omnipool model, the protocol can guide the pool with a certain amount of liquidity to better control price fluctuations of its commodities. This change is achieved by marking both sides of the guiding pool and obtaining liquidity.

For example, returning to the fighting game, if the protocol wants to introduce gems into the game, it can guide the GEM/GOLD pair with 100,000 GEM and 1,000,000 GOLD, implying a price (1 GEM = 10 GOLD). If the protocol plans to issue 1,000-2,000 gems next month based on user activity, they can calculate the minimum price of gems by assuming everyone exchanges their gems for gold. This information can help the team build a stronger model for the game's economy.

By controlling liquidity, the protocol can even deploy more refined methods. For instance, when players needing gems suddenly surge, it can cause gem prices to skyrocket. To curb the sudden price increase, the protocol can increase the depth of the liquidity pool by marking and adding both sides in the Omnipool. The same method can be applied during price crashes.

Note: The marking of these token protocols should inform the player community or accept governance.

Long-term Locking

Long-term locking is an excellent way to reduce sell pressure. Many DeFi projects have adopted such designs to curb issuance and increase long-term value alignment between token holders and the protocol.

One of the main criticisms of locking is that it imposes illiquidity on tokens. Many DeFi tokens are in this situation, but it is less of an issue for tokens in games. Tokens in games are inherently highly inflationary and liquid, so locking can be more valuable and constructive.

In the [BLOG], gamers can lock their GOLD through locking contracts in exchange for veGOLD. The exchange rate can be determined by a time function. For example, a gamer can set a lock-up period of one year for GOLD and receive 0.5 veGOLD, or lock for two years and receive 1 veGOLD. The longer the gamer locks, the more rewards and governance power they receive.

To utilize GOLD in the contract, the protocol can guide it as liquidity into its Omnipool to earn trading fees. This way, there is native yield for locking GOLD without requiring the protocol to mark more tokens to the system. However, for various reasons (IL and low APR), this may not be sufficient. The protocol can then increase the locked APR through traditional liquidity rewards (with or without special protective rights).

By locking GOLD in the locking contract, the protocol effectively removes it from the circulating supply and reduces sell pressure.

Locked Tokens and Governance in Crypto Games

One of the primary reasons for locking tokens in DeFi protocols is to ensure long-term value alignment. Therefore, most governance decisions are made by locked token holders. In the context of cryptocurrency games, this is not feasible for two reasons.

First, most games already have a dual-token system. Second, and more importantly, the balance of governance tokens is not the most suitable form for games. Gamers should not have to consider detailed, large numerical figures while playing. Therefore, based on these reasons, I introduce govNFT to address these issues.

After receiving veGOLD, gamers can use it to purchase these govNFTs. These govNFTs, depending on their levels, can grant players different cosmetic effects, abilities, and governance power to make simple governance decisions.

These governance decisions can be quite interesting; let me give an example of what might happen.

After some time, the game has matured, and there are different clans and guilds within it. Clan A consists of warriors. Warriors can easily kill monsters but are weak against another enemy—the wizard. For each monster killed, players receive 9 pieces of meat and 1 gem. So warriors have far fewer gems.

On the other hand, Clan B consists of wizards. Wizards can easily kill wizards but are weak against monsters. For each wizard killed, players receive 9 gems and 1 piece of meat. Since each clan has an abundance of resources on one side, trading can occur between the two clans to ensure effective resource exchange.

Now we introduce a simple governance structure: every week, the game will increase the kill rewards by 5 and reset them every month. These 5 rewards could all be meat—(monster kill = 14 meat + 1 gem) (wizard kill = 9 gems + 6 meat), or they could all be gems (monster kill = 9 meat + 6 gems) (wizard kill = 14 gems + 1 meat). For complete details, see the table below.

The final reward distribution will be decided by voting. If 80% vote for gems and 20% vote for meat, then the rewards will increase by 4 gems and 1 piece of meat for all kills. If 40% vote for gems and 60% vote for meat, then the rewards will increase by 2 gems and 3 pieces of meat. The yellow row represents the wizard's goal, and the blue row represents the warrior's goal.

With this simple governance structure, the game suddenly has an interesting game-theory dynamic. Warriors want the rewards to be 5 gems and 0 meat, while wizards want the rewards to be 0 gems and 5 meat. Each clan wants their income not to be diluted by the rewards. This competition increases the demand for governance power. Where does governance power come from? It comes from govNFT, govNFT comes from veGOLD, and veGOLD comes from GOLD.

If you are a DeFi native, you may recognize that this design comes from Curve's gauge design, which allows veCRV holders to direct liquidity rewards to different pools. In the [BLOG] design, I gamified the entire voting process, allowing gamers to decide based on their interests.

This way, the governance power of govToken holders will not be diluted. These game designs are currently determined by game developers. GovToken holders currently have no influence over these decisions, and their governance power mainly revolves around the main direction of game development.

Efficient Token Buybacks

To perfectly conclude the entire [BLOG] design, I introduce the Vortex system to achieve efficient token buybacks.

Token buybacks are a method of increasing local token purchase pressure by exchanging protocol revenue for local tokens. However, this design is ineffective in the realm of cryptocurrency games. Each game can be an independent system. The closed-system design poses obstacles to token buybacks in cryptocurrency games.

If all revenue in my example game is generated through GOLD (or other commodities), all I can do is burn it. So for 1 GOLD of revenue, I can burn 1 GOLD from supply. This is not unrealistic. If you are familiar with time discounting, you will understand this better. If not, don’t worry.

This is where Vortex comes in.

For gamers, after locking GOLD in the bank, they can 1) hold veGOLD to earn interest, or 2) use it to purchase govNFT. Now with Vortex, they can sell their veGOLD for GOLD. This is useful for gamers as they may need GOLD for more other game purposes. The veGOLD/GOLD Vortex system can be viewed as a liquidity pair of Uniswap v2, allowing users to unload their veGOLD according to market demand and supply at any time.

By purchasing veGOLD with game revenue, the protocol can ensure a more efficient token buyback system. Imagine my fighting game earns $1 million in protocol revenue, and I want to reduce the circulating supply. I can buy back over 1 million veGOLD through Vortex and burn them.

Each veGOLD represents 1 or more GOLD, so this can achieve higher capital efficiency. It is important to note that the exchange rate cap between GOLD and veGOLD is 1, as you can mint 1 veGOLD with 1 GOLD from the bank.

In Conclusion

The economy of crypto games is an emerging field with the potential to onboard the first billion users into cryptocurrency. I do not want their first experience in cryptocurrency to be like mine—watching my portfolio drop by 50% in a week. If we cannot eliminate these risks immediately, we need a more robust internal game system to mitigate these risks.

In this article, we proposed BLOG: a new economic model for cryptocurrency games that includes AMM, token locking, governance, and buybacks. While this universal framework is highly effective, it should be adjusted according to the goals of each project during implementation.

Due to its modular design structure, projects can also choose to use only a subset of the entire design. I hope this design can be beneficial for cryptocurrency game projects, and let us work together to help the next billion users onboard.