Should the GameFi token economy be designed as a single-currency or dual-currency model?

Author: Nat Eliason

Original Title: 《One vs. Two Token Models in Crypto Gaming》

Compiled by: 老雅痞

One of the most common questions I hear from the design teams of crypto game economies is: should we use one or two token models?

Until recently, my default response was always to use two tokens, but now I have been rethinking that suggestion. I believe that both choices have compelling reasons, and I will try to explain some of the nuances here. Perhaps there is a way to have the best of both worlds.

This article will primarily focus on the gaming sector, though similar ideas can certainly be applied to other crypto projects. Gaming is a great sandbox that allows for more token utility than other projects.

Let’s dive in.

What is the purpose of tokens?

The main purpose of tokens in crypto games should be to improve the game economy in some way that would not be possible without them.

Tokens are used for many other things like speculation, but as I explained in "Crypto Gaming is Broken," these other uses can ultimately harm the quality or future of the game.

So how do tokens improve the game economy in a new way? I believe this is primarily achieved by closing the loop of microtransactions. Unlike a one-way channel where players engage in microtransactions to unlock some additional utility in the game, crypto tokens enable a two-way channel—players can also extract some value from their work in the game. They allow those who invest a lot of time in the game to convert that time into capital, and they allow those with capital to trade in a new way to save time.

These transactions can take two forms:

• Application Transactions: Players pay game fees to obtain battle passes, skins, loot box keys, or game progress.
• Peer-to-Peer Transactions: Players pay each other for in-game resources. These can be NFTs, currencies, or anything else.

These transactions have existed in games for a long time. We are all familiar with in-game trading and auction houses. A key distinction enabled by tokens is the ability to create a liquid market between the game and "real money." A way for players to exchange their Runescape gold for dollars (through a few extra steps).

In my view, any other utility is secondary. It’s not that other utilities don’t exist, but this should always be the primary value of introducing crypto tokens into the gaming space.

So what are these other utilities? Fundraising is a big one. Guess another. Governance can also be one of them. You could also include cash flow or ownership as a more serious speculative version. But we need to recognize that the introduction of tokens is often not about making the game better, but as a way to help fund the game. Then the question is whether this can be done in a way that also benefits the game and the community, or whether it ultimately always conflicts with creating a good game.

With two-token models now more common, let’s start there.

Dual Token Model

This two-token model was pioneered by Axie Infinity with its AXS "governance" token and SLP "in-game" token.

AXS is a fixed supply token designed to accumulate value over time, while SLP is an infinite supply token that can be minted and burned as needed to balance the game.

In this model, AXS is essentially a security. It’s like holding stock in the Axie game. Of course, the team can’t really say that, but that’s what it’s doing. Governance is often just a facade utility to circumvent security issues. SLP is the real "game" token because it is the foundation upon which most game economies operate.

Benefits of the Two-Token Model

The benefit of this model is that you can separate speculation from the game economy. When you launch anything in cryptocurrency, people will speculate on it in an attempt to get a nice quick return. Having one token for speculation and another for playing the game allows these two uses to operate separately, so that speculative surges do not lead to skyrocketing in-game prices. You don’t want speculative surges to suddenly inflate the prices of all items in the game.

This also makes fundraising easier. Investors want a fixed supply token that has some rationale for appreciating over time. A variable supply game currency is not a great investment asset because game creators can adjust the token’s issuance, burning, and utility at any time. They may need to try to push its value in one direction or another to balance the game.

This type of two-token model is also familiar. People are used to seeing two tokens from Axie and other games that follow its model, so they intuitively "get" a token for speculation and a token for playing. This is also similar to our view of regular currencies, where gold or bitcoin is the asset you hold, while the dollar is the asset you spend.

Downsides of the Two-Token Model

When a game is surging in popularity and the market is hot, the two-token model looks perfect. One token remains relatively stable while people play the game, and the other token is steadily rising, making people feel excited about NGU speculation.

But when the celebratory music stops or slows down, people start to wonder: what is the point of this governance token? People are unlikely to hold millions of dollars in game tokens just to vote on governance measures. Players need more reasons to hold.

The question of "what is the point of a fixed supply token?" is a significant downside of the dual token model. So there are a few ways to address this:

What is the use of a Fixed Supply Token?

Having a purely speculative fixed supply token (FST) ultimately leads to the question of "hey, why are we holding this?" Speculation cannot keep prices rising forever, so the token must have some meaning.

Some teams will take the approach of increasing cash flow, often through staking. This can go two ways:

• Dilution Protection: You stake your tokens for more of the same tokens. This is not real cash flow, just dilution protection as more tokens unlock. But at least it still looks like "free money."
• Dividends: Stakers receive some other tokens representing game expenditures. But this is difficult to achieve because if you redistribute the funds collected through application transactions, it turns into a Ponzi scheme. So it’s really best to redistribute fees in peer-to-peer transactions.

Dividends from peer-to-peer transactions can also be quite substantial. For most of the past month, STEPN has had daily transaction fees of 2-3 million (STEPN recently exited the Chinese market). With 600 million GMT tokens in circulation, let’s assume half of those tokens would be staked if there was staking. If they split the transaction fees 50/50 with GMT holders, that would mean $1 per day for staking 300 million GMT or about $0.003 per token daily. Given that the average price of GMT last month was $1.50, that’s a daily dividend of 0.2% or a non-dilutive APR of 73%. That’s incredible! They haven’t done this, but it does show that dividends from peer-to-peer transactions can be significant.

If the team does not want to add cash flow, or if they want to add something beyond cash flow, they will add in-game utility for the fixed supply token.

This is what Axie ultimately wanted to do by introducing breeding costs for AXS. In this case, the FST becomes an additional in-game currency, with the distinction that it has a fixed supply while the other token has an infinite supply. Game designers can choose whether they want these used tokens to be burned or recycled and use them as an additional check on the game economy.

However, the utility of the FST becomes tricky. What to use the FST for compared to the VST (variable supply token)?

There are good arguments for using both as market tokens and application transaction tokens.

I believe that if teams are going to add utility to the FST, that utility should have some impact on the token's supply. The purpose of increasing utility is to drive the value of the FST, but if it is just used as currency like the VST, then holding it has no utility. You can buy it when you need it and sell it when you don’t. However, if the FST is burned when used for special upgrades in the game, then as the game becomes more popular, both the FST token and the assets with those upgrades should become more valuable over time.

However, teams that take the dual token route will ultimately still encounter this problem. Unless they find a way to add value or utility to the FST, it will be dumped, and many speculators will be left behind.

So what if they try a single token model?

Single Token Model

Attempts to use only one token are far fewer. But it offers some promise as a way to address the issues of the dual token model.

One thing to remember is that a single token model does not necessarily mean there is only one currency in the game. The game can have multiple currencies, but only one serves as the bridge between the game and cryptocurrency.

There are several ways to achieve this.

VST One Token Model

One option is to create a single token model that only has a variable supply token. I haven’t seen a good example yet, but it makes sense as a game token model that tries to strictly follow some of the ideas I presented in "Crypto Gaming is Broken."

This goes back to my point at the beginning of this article. The purpose of crypto assets in games is to allow people to convert their work in the game into real money outside the game.

If game studios want to achieve this without involving complex token economics, here’s a very simple way.

• Build a great game with an in-game market (like Runescape, WoW, etc.)
• Create a bridge between the core currency and the blockchain
• Use another token (ETH, USDC, etc.) to add liquidity to that currency

Alright, that’s basically it. It seems simple, but in many cases, that’s all we need. Imagine a highly liquid gold <-> USDC market in Runescape. That would be amazing, right?

You don’t even need to make items that are NFTs because, honestly, without a game, game items are worthless. Just keep the normal auction house where players can exchange everything for gold, add a gold bridge, and you have a thriving, awesome crypto game.

Why haven’t we seen successful use cases like this? Because making fun games is incredibly difficult. Some games are adopting this approach, but most of them have not yet launched to the market. When they come out, they will be harder to gain traction because they won’t have an exciting ponzinomic loop above them. Honestly, those proliferating Ponzi loops are an excellent marketing strategy for initial hype.

Another downside of this model is—people can’t speculate on which token it is. At least for now, it seems that achieving success in the crypto space does require some speculative opportunities. Without some fixed supply assets, it’s also hard to raise funds from investors, most of whom want something they can hold long-term and see appreciate in value.

So next, let’s consider a fixed supply one token model.

Fixed Supply One Token Model

Can you build a crypto game that only has a fixed supply token? This is the route taken by some earlier launched crypto gaming platforms like Sandbox and Decentraland. And I think we might see it become popular again as an improvement over the two-token model.

This is a somewhat speculative approach. It’s still under discussion, so don’t just copy and paste and assume it will work.

In this model, you have your fixed supply token, which serves as an investable asset as well as the bridge for all in-game funds.

But you still need to provide more variable supply currency in the game to better balance the economy. So you still have the VST, which is just locked in the game without a bridge.

Then, you create an in-game DEX between the VST and FST and any other in-game assets. This is actually a better trading mechanism, like trading wood for gold, because it creates a SushiSwap or Uniswap-style liquid market that can trade anything instantly without needing another buyer on the other side.

So players can always exchange gold for FST, bridging FST. Or they can buy gold and wood and anything else they want with the FST bridge.

Since the FST has a fixed supply and all items in the game will create inflation, the purchasing power of the FST should increase over time without being drained. Early players will be rewarded as their labor becomes more valuable in FST, but later players can still play and earn.

Separating from the resource market, you can have a project market. These items can be extracted as NFTs or locked in the game. I don’t think there’s much difference. You can price everything in the market in FST and then deposit transaction fees into the treasury or burn them. If you burn them, then over time you will create some deflation, which will also help bring more value to the FST.

Another option is to price the commodity market in major crypto assets like ETH. The huge benefit here is that transaction fees are an asset that is not tied to game performance. If you charge transaction fees in your own token, you still have to sell that token on the market to generate revenue. If you charge transaction fees in ETH, SOL, or USDC, then you will receive that revenue immediately.

This also requires players to bridge other assets like ETH, SOL, or USDC into the game, which will be stored by the treasury. The treasury can earn yield while holding these assets, creating an additional revenue stream for the game.

So the question arises, how does the FST generate value? Here, you can reintroduce a dividend model, but the dividends are paid in assets used in the market. So by staking my FST, I can earn some ETH or USDC in the game without having to deal with some complex on-chain staking system. That would be really cool, and it’s not something I’ve seen any game attempt. Although I think it would be legally complex.

Then you could also allow it to earn some dividends from the transaction fees of all other swaps. By locking tokens in the game, you can earn some ETH, some in-game VST, and more FST from different transactions happening in the game. This would make it an extraordinary investment asset, and over time, it would increase its value by increasing the purchasing power of the FST against inflationary assets. If you do some high-value burns on it, then you will have a very strong argument for the token as an investment.

Through this model, I believe it is much stronger than the currently popular two-token models. It adds a lot of flexibility and ensures that there is a core asset that appreciates in value within the ecosystem. If you just want to build a game related to cryptocurrency, the VST single token model is ideal. But this FST model allows you to retain some of the more speculative aspects of cryptocurrency, as well as investability over time.

This article is purely a thought exercise and certainly needs some refinement. But I hope it helps any team trying to think about how to build their token economics.