Ten Questions and Answers: A Guide to Tokenization in Web3 Games

Written by: Kira Sun, Partner at Incuba Alpha

STEPN has injected a surprising momentum into the long-dormant GameFi, also known as Web 3.0 gaming, with its innovative carbon-neutral concept and "Move-to-Earn" model. We have seen practitioners exploring the X-to-Earn model more deeply, as well as their profound thoughts on the interplay between complex gameplay and token economics. We are even more surprised to see blockchain gaming projects moving from simple and short-lived mining skin-swapping models to rich gameplay, high-quality production, and sophisticated economic systems and metrics in GameFi 2.0.

Since then, many game developers and project teams have embarked on the exploration of Web 3.0 games. These game teams have impressive backgrounds and achievements, with pioneers in Web 3.0 providing consultancy. Although the recent market downturn has led many to question whether GameFi 2.0 is a false proposition, we firmly believe that this is just the beginning of the industry's transformation. We also hope to present our views and thoughts on Web 3.0 games through these discussions.

This article compiles ten questions we have recently discussed with numerous game teams and attempts to answer one theme: What problems need to be solved to create a successful Web 3.0 game?

Question 1: How did games in the GameFi 1.0 phase gradually lose attention?

Every conversation basically starts by identifying problems from other projects.

Now that the market has passed the most FOMO phase of GameFi, people can easily summarize the reasons why many star projects in the GameFi 1.0 phase have failed, such as a lack of gameplay, absence of in-game asset consumption mechanisms, excessive gold production speed, extreme token price fluctuations leading to abnormal prices for game equipment or outputs, inflation destroying the game economic system, and a lack of new players to sustain the Ponzi scheme, etc.

Changes in transaction volume and new account numbers for Axie Infinity from April 2021 to present

Source: https://dune.com/zhai/Axie-Infinity-(AXS)-onchain-analytics

These reasons certainly exist objectively, but our perspective is more intuitive. Viewing these games through the lens of national economies, their consecutive falls mirror the situations of countries (such as South Korea, Vietnam, Malaysia, Russia, etc.) that collapsed like dominoes during the financial tsunami. These countries experienced brief economic booms, but were accompanied by massive increases in foreign debt and inflows of foreign capital. They supported their currency exchange rates with high foreign exchange reserves, but when hot money flowed out uncontrollably, they were forced to face the consequences of severe currency depreciation and falling asset prices. The game projects that briefly shone in the GameFi 1.0 phase also personally experienced this process.

Source: https://www.rba.gov.au/speeches/2007/sp-gov-180707.html

We believe the biggest lesson from these projects is their neglect of the classic monetary theory of the "impossible trinity."

The "impossible trinity" simply states that a country's currency cannot simultaneously achieve the following three points:

1. Stable currency value
2. Independent monetary policy
3. Free capital movement

Most GameFi 1.0 projects initially aimed to:

1. Ensure the free flow of capital. Taking Axie Infinity as an example, players can freely buy or sell SLP/AXS and in-game NFTs using ETH.
2. Independent monetary policy. Each game has its own token output, consumption, and unlocking rules, akin to a country wishing to implement an independent monetary policy without dependence on others.
3. Stable currency value. However, due to their independent monetary policies, many games' token prices inevitably experienced significant fluctuations due to the inflow and outflow of players and hot money, ultimately leading to financial crises and disastrous outcomes.

Therefore, creating a successful Web 3.0 game is by no means as simple as replacing equipment or resources from Web 2.0 games with NFTs, or distributing the original in-game points as tokens.

If we view it from another angle, considering "blockchain games as national economies," traditional games can generally be understood as a form of "closed economy" or "open economy." In contrast, Web 3.0 games, due to the characteristics of blockchain, are inherently "open economies." Whether it is the design of NFTs or tokens, it essentially represents a process of "reform and opening up." Issuing NFTs or tokens is akin to a closed, self-sufficient economic entity attempting to open up industries, attract foreign investment, incur foreign debt, set exchange rates, and modify monetary policies. This poses a new shock to the originally complete game value model that was in a closed state. Therefore, simply replacing the original circulating currency or points in the game with tokens will lead to severe imbalances in the economy due to the free flow of capital.

Question 2: What will GameFi 2.0 look like? Which games are suitable for becoming Web 3.0 games?

We believe that MMORPGs will be the main game type leading the GameFi 2.0 phase and are one of the most suitable types to be transformed into Web 3.0 games.

If we classify games comprehensively based on player investment costs, content depth, and gameplay difficulty, they can generally be divided into heavy games, medium games, and light games.

Heavy games mainly include well-known AAA titles, such as GTA, often humorously referred to by players as "Game Takes Ages"; medium games can cover most role-playing, sports, strategy SLG, real-time strategy RTS, card games, etc.; light games can be compared to casual games like Candy Crush.

For Web 3.0 games, competing in graphics and experience is absolutely not a match for traditional AAA heavy games. Light games primarily target players' fragmented entertainment needs, consuming less of players' time, money, and attention, and lack multiple layers of asset circulation, so these games are more suitable to be designed as PvP "casino" models, which are not within the scope of this article's P2E discussion. Therefore, we believe that the most suitable category for innovative Web 3.0 transformation should focus on medium games.

Among these games, MMORPGs are what we consider the most suitable category for transitioning to Web 3.0 games. Compared to traditional AAA games, they possess social attributes and have very complex in-game economic systems.

MMORPG (Multiplayer Online Role-Playing Game) refers to large-scale multiplayer online role-playing games, characterized by rich worldviews, strong playability, ample social experiences, and very mature game development and design mechanisms. The overall gameplay of MMORPGs is relatively mature, with extremely rich, realistic, and long-lifecycle economic systems—centered on "trading," emphasizing the asset and economic nature of the game. In-game equipment is considered players' assets, and trading activities are very active; some individual players have generated revenues as high as $1 million within six months from their in-game equipment shops. These advantages make the lifecycle of MMORPGs longer than other types of games. Well-known games like World of Warcraft and Dream of the Red Chamber have been running stably for 19 years, and several MMORPGs in Roblox have been running for 9-10 years with considerable revenue.

Most importantly, referring to the development trajectory of traditional games, we believe that the current GameFi is closer to the market phase before the MMORPG explosion after 2000.

Compared to the simple and crude mining model of GameFi 1.0, GameFi 2.0 is a true practice of the Play-to-Earn (P2E) model. The most important mission of GameFi 2.0 is to ensure that blockchain games possess entertainment, social, and economic attributes simultaneously, with asset ownership truly returning to players, allowing them to gain sustainable income through the in-game economic circulation system while enjoying the gaming experience.

In fact, for traditional MMORPG players, P2E is not a new term, nor is it an original concept of Web 3.0 games. For over a decade, many players of World of Warcraft or Dream of the Red Chamber have been well-versed in how to make money through gaming, and there were already websites showcasing WoW Gold prices against the US dollar. Of course, while the official encourages players to earn in-game gold, the RMT (Real Money Trading) behavior of converting in-game gold into fiat currency is also strictly suppressed by the authorities, and we will discuss the specific reasons in detail later.

Combining the successful experiences of predecessors, how to develop these "closed economy" MMORPGs into "open economy" Web 3.0 games will be a key question we need to answer.

Question 3: How many tokens should there be in a Web 3.0 game?

Conclusion: We recommend that game developers construct a three-token or four-token system in Web 3.0 games.

After decades of development, traditional games have basically formed a classic three-token or four-token model within closed economies: including gold coins, silver coins, gems (and points). However, it is important to note that within an economy, the flow of different currencies must be one-way, forming a one-way exchange mechanism from fiat currency to gold coins to silver coins to gems.

Users' fiat currencies (e.g., RMB and USD) can first be converted into gold coins. As the first entry currency of the game, gold coins represent the accounting unit of fiat purchasing power. Gold coins cannot be exchanged back for fiat currency.

Gold coins can be exchanged for silver coins at a certain ratio. Silver coins are the main circulating currency in the game, which can be produced through gameplay and are also the main currency for upgrading, repairing, and refining in the game. Silver coins serve as the primary medium of currency within the game economy, and silver coins cannot be exchanged for gold coins.

Silver coins can be exchanged for gems, which are used to draw treasure chests, purchase premium items, and participate in limited-time sales of rare skins in the official shop. Gems can only be used in the in-game shop and cannot be exchanged back for silver coins, nor can they be transferred out of the game. The one-way flow of silver coins into gems is designed to encourage the consumption of silver coins by introducing scarce high-end equipment, achieving deflation of gold production through consumption.

Some games may have a fourth currency—points. Points are generally earned through daily active tasks (e.g., logging in, meeting specified gaming durations, etc.). Points can be exchanged for gems for in-game consumption; however, they cannot be exchanged for gold coins or silver coins, cannot be transferred to others, and cannot be converted into fiat currency. This is to prevent players from earning points through excessive logins on multiple accounts, exchanging points for silver coins, which would create significant selling pressure on silver coins.

The aforementioned RMT (Real Money Trading) refers to the process where users exchange silver coins earned in the game back into gold coins or even fiat currency. The authorities are vigilant about this aspect to prevent numerous gold farmers from creating multiple accounts to farm more silver coins and cashing them out through silver coin exchanges, which would lead to selling pressure on silver coins, causing inflation in the game and disrupting asset prices, thus harming the gaming experience.

• The one-way flow of silver coins into gems is also aimed at encouraging the consumption of silver coins by introducing scarce high-end equipment, achieving deflation of gold production through consumption;
• Points especially cannot be exchanged for silver coins or gold coins to prevent players from earning points through excessive logins on multiple accounts, exchanging points for silver coins, which would create significant selling pressure on silver coins.

The economic mechanisms of Web 3.0 games are vastly different from traditional games. Before proceeding with the following arguments, we first present a conclusion: we recommend that game developers construct a three-token or four-token system in Web 3.0 games, but their economic models cannot simply and directly "copy and paste" from traditional games; otherwise, they will only fail.

As Web 3.0 games force game economies to shift from "closed planned economies" to "open economies," the specific functions of various tokens (assets) in the game will differ significantly from those in traditional games. We can abstract a token framework:

1. The role of gold coins in traditional games will be played by a pricing token in Web 3.0 games (e.g., ETH/BNB/SOL). Users generally need to spend the pricing token to purchase a certain NFT to enter the game, such as running shoes in StepN.

2. The main circulating currency in the game—silver coins—resembles the in-game consumption tokens in Web 3.0 games, such as $SLP in Axie Infinity, $THC in Thetan Arena, and $GST in StepN. These tokens primarily circulate within the game, serving as the main medium of circulation, with no upper limit on total issuance;

3. In Web 3.0 games, traditional gems are replaced by governance tokens with a capped issuance, such as AXS/THG/GMT. Governance tokens are an important innovation in Web 3.0 games, serving not only the role of purchasing items in the official shop but also playing key functions in external economic circulation, player participation in governance, and game rewards. Governance tokens are also proof of players' rights, which is a significant hallmark of Web 3.0.

4. The functions of points in traditional games are largely absorbed by silver coins in Web 3.0 games (e.g., SLP/THC/GST).

On the surface, Web 3.0 games seem to be able to map or transfer the token design system of traditional games. However, this seemingly simple transfer process is most likely to lead to the collapse of the Web 3.0 game economic system.

As mentioned earlier, traditional games strictly regulate the one-way flow of funds, i.e., the circulation path of fiat currency - gold coins - silver coins - gems. However, in Web 3.0 games, since on-chain assets can be traded in secondary markets, project teams have no authority to interfere with the free trading of pricing tokens like ETH, BNB, or SOL and NFTs, nor can they restrict the buying and selling of consumption tokens like SLP or GST. Many exchanges have listed trading pairs for consumption tokens (although I believe this is not a good thing for game project teams), and governance tokens are even wildly speculated by users.

You can imagine that in Web 3.0 games, large amounts of hot money capital freely impact the game economic system at any stage, severely disrupting the rules of the "impossible trinity." If a game wishes to maintain free capital flow (unable to prohibit players from trading tokens and assets on the blockchain) and an independent monetary policy (the game has its own inflation control mechanism), it can only be forced to abandon stable currency values, ultimately leading to large-scale depreciation of game consumption tokens and governance tokens.

We can also ponder a hypothetical question: if game project teams were to replace consumption tokens with USDC or ETH/SOL, allowing players to earn real money, would this be better for Web 3.0 games? Who pays the bill for the real money earned by players?

Based on the above experiences, we believe that the token design of Web 3.0 games needs three types of tokens:

• Game consumption token
• Game governance token
• Game adjustment token

We may also consider adding a design for active points depending on the situation, and the specific design will be discussed in the following questions.

Question 4: Are Web 3.0 game tokens destined to die?

Before delving into specific designs, we want to clarify the ultimate goal of token design: is there a design that can truly build an "infinite game" that never collapses?

Our conclusion is that both Web 2.0 and Web 3.0 games have their lifecycles. According to economic laws, game consumption tokens will inevitably experience inflation, but we can control the inflation rate of tokens through scientifically designed economic models to extend their lifecycles as much as possible.

There are many reasons for the continuous depreciation of game consumption tokens, such as:

1. Some inherent defects in the economic model that cannot be eliminated. For example, the output path of game consumption tokens is numerous, but the consumption paths are few; the existence of multiple substitutable currencies in the game leads to a long-term oversupply of game consumption tokens, causing prices to fall;
2. Insufficient long-term operational efforts, weakened gameplay, and a large number of players leaving the game, leading to depreciation of consumption tokens and various equipment;
3. An influx of gold farming studios and account boosting workshops into the game, resulting in excessive short-term output of game consumption tokens.

As the game continues, the number of high-level players increases, the wealth gap widens, productivity growth slows, and soaring prices and currency depreciation may be inevitable outcomes.

Of course, we also see many MMORPG games that have remained stable for over ten years, with stable economies. Besides the precise calculations and adjustments made by the operational teams during the game's development process, they also possess sufficiently complex in-game economic systems to support the long lifecycle of the game. We believe that Web 3.0 games will also have opportunities to explore a long-lifecycle token economic model, but continuous numerical adjustments and operational maintenance are essential.

Question 5: How do Web 3.0 game tokens circulate?

In our envisioned Web 3.0 games, there are three types of tokens: game consumption tokens, game governance tokens, and game adjustment tokens. Among them, game consumption tokens are the most important currency medium in the entire economic system.

The circulation of game consumption tokens is mainly achieved through output and consumption:

• The output (supply) of game consumption tokens is primarily determined by the gameplay, with common gameplay mainly being growth systems (e.g., PvP battles and PvE adventures), social systems (marriage, alliances, or forming guilds), or daily fixed tasks in the game; while the consumption (demand) of game consumption tokens mainly comes from player development, with the main development methods including costs and probabilities for leveling up, equipping, and skill refining. A healthy game economic system needs to achieve a relative balance between output and consumption.
• To achieve a balanced state of token output and consumption, numerical planning and calculations are required. The biggest challenge in designing Web 3.0 games is the shift from "closed economies" to "open economies," introducing many uncontrollable external variables.

Therefore, we believe that a healthy Web 3.0 game should have the following core pursuit goals:

• The value of all assets in the game should be determined by players' "socially necessary labor time," rather than solely relying on the time players spend in the game (Note: Marx's "Capital" points out that socially necessary labor time refers to the labor time required to produce a certain use value under normal social production conditions, with average labor proficiency and intensity). Thus, the most important economic mechanism in the game is to ensure that the output types of every game activity are as diverse as possible and that each player's gaming behavior generates as much consumption as possible, whether in terms of time, money, or other resources, ensuring that all assets in the game have a consumption mechanism;
• As the most important medium of circulation in the game, game consumption tokens should adopt some mechanism to ensure relative price stability. The ideal state is that they neither rise nor fall significantly. Large fluctuations in game consumption tokens can be very damaging to the game, so mechanisms should be designed to balance output and consumption, ensuring that game consumption tokens are in a state of slight deflation or slight inflation;
• Minimize trading friction for asset outflows in the game, such as raising the threshold for exchanging game consumption tokens for external assets like ETH/SOL; implementing "foreign exchange control" measures to achieve the goal that "money earned in the game is spent in the game";
• Governance tokens should find usage scenarios with inherent purchasing demand, increasing the leverage of governance tokens for game players;
• Establish continuous numerical monitoring and analysis capabilities, and flexibly adjust currency circulation policies based on system changes.

Question 6: How to achieve the above goals, and how to stabilize the value of consumption tokens after circulation?

According to the "impossible trinity" theory in economics, a country cannot simultaneously achieve stable currency value, independent monetary policy, and free capital flow.

Correspondingly, in the economic system of Web 3.0 games, the main goal of game project teams should be to ensure the stability of game consumption token values and implement independent monetary policies.

First, project teams must implement strict capital controls, limiting the free flow of funds within the game and creating some friction costs for capital outflows, aiming to keep players' capital flows primarily one-way. For example, players' gold production outputs must have a certain withdrawal lock-in period, increase transaction fees for trading game assets (NFTs), and set limits on the amount of consumption tokens players can hold in their inventories.

Secondly, control the output and consumption of game consumption tokens. First, set output constraints; STEPN sets user invitation codes, diminishing marginal output of running shoes, and wear and tear on shoes, all of which are typical ways to control the output of $GST (game consumption tokens).

Additionally, project teams need to enhance the consumption level of game consumption tokens, which is the most important and core means of stabilizing token values. In STEPN, the wear and tear repair, upgrading, and synthesis of running shoes can effectively increase the consumption of $GST based on well-calculated values. If the game itself is entertaining and addictive enough, it may lead players to consume more than they earn, fostering a virtuous cycle.

On this basis, games often need to set special consumption mechanisms for high-level players. Many newly designed game modes, such as guild battles, PvP, peak competitions, and cross-server battles, are aimed at continuously increasing the consumption of game consumption tokens by high-end players, alleviating inflation within the game economy. This can enhance the overall gaming experience and maintain the balance of the player ecosystem.

At this point, you may realize that the so-called X-To-Earn model is not the key to STEPN's success. If we delve into STEPN's token economy, the multi-channel consumption and the stable performance of GST may be the secret to its success. Although STEPN is an app, its economic logic seems to be no fundamentally different from that of MMORPGs like World of Warcraft.

Question 7: What foundational components are needed to achieve the above goals?

We believe that many current Web 3.0 games lack monetary and fiscal policies that align with the characteristics of Web 3.0 games in their designs. Introducing a combination of an official shop (NFT Marketplace) + game adjustment tokens is a necessary component for establishing the basic central bank and monetary policy within the game.

NFT Marketplace

First, Web 3.0 games currently have the idea of incorporating an NFT Marketplace in their roadmaps, primarily to provide services for players to trade in-game equipment.

We believe that the NFT market in the game should have two basic functions:

1. Facilitate peer-to-peer transactions among players, with the market only allowing transactions using game consumption tokens;
2. Serve as the official shop for the game, catering to the official team and high-level players, primarily aimed at trading limited-time, high-quality equipment, pets, items, and other scarce game assets, which can be traded using the third type of token, the game adjustment token.

The official shop is an important supplement to the peer-to-peer trading market among players and a crucial means for the game official team to actively implement monetary policies and regulate inflation within the game. The official shop should involve the game project team and high-level players meeting certain standards, with the game project team setting rules to introduce premium resources into the game, allowing high-end players to trade or auction these premium resources using game adjustment tokens.

At the same time, we believe that some low-end assets with abundant supply in the game, such as stardust and fragments, do not necessarily need to be made in NFT form. These assets typically lack scarcity and can be treated as ordinary assets within the game, lowering the entry barrier for ordinary users. Alternatively, they can be made in FT form, allowing players to trade quickly with the game as the central liquidity counterparty through AMM (Automated Market Maker), also enabling the game project team to directly regulate the economy.

Game Adjustment Tokens

We recommend that game adjustment tokens be designed as a type of "over-collateralized stablecoin" similar to DAI or sUSD. This stablecoin does not necessarily need to be pegged to the US dollar; the core goal is to create a relatively stable medium of exchange and to absorb the fluctuations of game consumption tokens by adjusting the supply and consumption of this medium.

The generation of adjustment tokens must be collateralized with a certain amount of governance tokens, meeting certain "loyalty conditions" (such as staking a certain amount of governance tokens or fulfilling a staking period) to mint tokens through over-collateralization, which can be used for transactions in the game shop. The over-collateralization rate can be dynamically adjusted as the game economy develops. This can also be combined with an achievement "NFT" system in the game, where high-achieving users can obtain better staking and minting conditions.

This stablecoin is primarily used to support transactions in the official game shop and can also be used in scenarios where players receive penalties or achievements. Additionally, the game should encourage users to purchase this stablecoin directly using external tokens (ETH/SOL) or other stablecoins, but after purchasing, it should be difficult or impossible to sell back.

This design allows the token to absorb fluctuations caused by temporary supply and demand imbalances within the game.

If the output of game consumption tokens is excessive, leading to rapid depreciation, the official shop can introduce more limited high-end equipment, encouraging users to mint or purchase algorithmically stablecoins with their consumption tokens, increasing the locking and buying pressure of consumption tokens; or directly adjust the gold production output model, allowing part of the output to automatically convert into adjustment tokens, reducing selling pressure on consumption tokens.

If the consumption of game consumption tokens is excessive, leading to rapid appreciation, the official shop can lower the collateralization rate, allowing players to destroy stablecoins and release game consumption tokens to increase supply. Alternatively, the game officials can launch limited-time welfare activities, encouraging players to spend stablecoins in certain game scenarios to gain additional income from consumption tokens. In the future, there may even be official loans available in the official shop to buffer the value fluctuations of game consumption tokens.

At the same time, the holding limit of game adjustment tokens should be set based on individual player levels, or any amount exceeding the limit will be incentivized to be locked or destroyed through some mechanism. For example, in Dream of the Red Chamber, the amount of gold coins a player can hold in their inventory is capped, and any excess will be temporarily stored by the officials, allowing players to retrieve it for consumption after a specified time. In GameFi design, non-linear staking parameters can be used to incentivize users to lock or destroy tokens exceeding a certain amount to exchange for scarce NFTs. The total issuance of game adjustment tokens should also have an upper limit, anchored to a multiple of the transaction volume within the game. When the leverage ratio within the game reaches a certain level, no additional game adjustment tokens should be issued to prevent excessive issuance from impacting the original economic system.

Game Governance Tokens

Currently, the VE model (voter escrowed) has become a relatively popular governance token design. It solves the issue of 1 Token = 1 Vote through a token-locking mechanism, preventing whale users from participating in malicious voting. However, we believe that the rights of governance token holders need to be more closely tied to the game economic system.

As mentioned earlier, MMORPGs and medium games are the most suitable for transformation into Web 3.0 games. These games have high investment costs, long development cycles, relatively high failure rates, and significant costs for customer acquisition after the game launch. The customer acquisition cost for traditional games is around several dozen dollars. In Web 3.0 games, game developers can complete customer acquisition through the issuance of governance tokens and game NFT assets, and even recover some development costs in advance. Compared to traditional games, this approach represents a significant innovation in customer acquisition for Web 3.0 games.

In our view, the utility of governance tokens should extend beyond revenue distribution, buybacks, and staking incentives, to include more in-game usage scenarios. For example, high-level players wishing to open shops in the official game shop must pay governance tokens as opening and promotion fees, which will create considerable consumption of governance tokens; players holding governance tokens or meeting staking conditions can be granted titles or enhanced game attributes; opening game parameter permissions to allow players to actively participate in governance voting.

A successful Web 3.0 game can be viewed as a massive exchange. Different exchanges have the rights to control seats, set trading rules, and seek rents. Game governance tokens turn the rights to seek rents into assets, which possess financial attributes and serve as an important "leverage" in the operation of Web 3.0 games. We look forward to more creative project teams designing innovative mechanisms to leverage this leverage.

Question 8: What other innovative gameplay does Web 3.0 gaming have besides DeFi?

This is a hypothetical question, but we might as well explore some scientific deductions.

In the previous question, we actively discussed the monetary policy of games, but there is actually another important pillar outside the game economic system, which is fiscal policy. In national economies, fiscal policy is an important path for economic intervention, with revenues such as tax income or fund income (land sales income) and expenditures for adjusting income distribution and other policies.

MMORPGs are games centered around trading, generating massive trading behaviors and volumes. The sale of NFTs, trading of NFTs and tokens, resource production, and capital circulation in the game will generate significant fiscal revenue, tax income, and asset sales income for the game. As the user base increases, the entire game will evolve into a massive exchange, and the volume of these trading revenues will become substantial. In traditional games, these enormous economic benefits are captured by game developers, while in Web 3.0 games, game revenues are incorporated into the treasury and shared with game participants, undergoing community governance.

Additionally, game project teams can utilize fiscal revenues to balance game values or adjust the wealth gap among players, providing financial support to some highly active small R players or merchant guilds.

We have also observed that many MMORPGs have multiple local servers, each with different economic models and inflation levels. We believe that game project teams should allow whale players to carve out new land resources within the game ecosystem, establish their own nations, and define their own monetary policies and economic parameters, bringing more gaming experiences. At the same time, whale players opening new continents should pay taxes to the project team in the form of governance tokens, which will also enrich the gameplay of land assets in the game.

Game project teams should also pay more attention to players' customization needs, such as allowing players to customize NFTs (face customization systems), opening game editors, and allowing players to create UGC content or customize exclusive items. These highly customized needs will require the consumption of governance tokens. UGC equipment can also take the form of NFTs, with royalties paid to original creators for each transaction, stimulating player creativity within the game system.

Question 9: How should your target game users be portrayed?

A healthy player structure in games generally presents a pyramid shape. The rare high-level players at the top only spend money without grinding, the middle players both spend and grind, while the bottom players only grind without spending. Games need to rely on high consumption from the top-level players to generate the majority of their revenue.

The Play To Earn model that Web 3.0 games emphasize raises the core question: who pays for the players' earnings? In the GameFi 1.0 phase, there was only one payer—the trading users in the secondary market.

As blockchain games transition to the GameFi 2.0 phase, we hope more users will participate in the game due to its entertainment value, gradually forming a healthy pyramid structure, allowing Play-To-Earn to shift to Free-To-Play and Skill-To-Earn.

We anticipate that in GameFi 2.0, there will be three groups paying for players' P2E: one is still the secondary market trading users, while the other two are game users paying for entertainment experiences and identity symbols, and advertisers, esports events, and media platforms outside the game system.

During discussions with many game project teams, two questions are inevitably raised between investors and project teams.

First, what are the target players and corresponding market strategies?

The concern behind this question is that the so-called Web 3.0 users in the current market phase are primarily gold farming and asset speculation users. A game with excellent quality, beautiful graphics, and immersive experiences may not be what Web 3.0 users want. For Web 3.0 users, perhaps because the game quality is too high and the worldview too complex, gold farming players find the rules difficult to understand, resulting in unexpected commercial outcomes.

Traditional game players are similar; some traditional games have attempted to incorporate NFT and FT asset mechanisms into their games but have not garnered enthusiasm from traditional players. Ubisoft introduced NFT designs in their games but faced severe backlash from mainstream players, who ideologically detest the emergence of NFTs, believing they lead to adverse speculation on game assets. After the launch of the classic game MIR4 by Wemade, the original free-to-play and paid item model was changed to encourage players to Play to Earn, but the game was flooded with cheats, accelerators, and other cheating tools, affecting player experience and disrupting the balance of the economic system, leading to unsatisfactory market feedback and asset price trends.

Price trend chart of MIR4 DRACO / HYDRA

Therefore, hastily launching a high-quality Web 2.0 game as a Web 3.0 game may lead to a vortex between two different user groups, ultimately failing to satisfy either side.

We believe that at this specific time stage of GameFi 2.0, Web 3.0 users still do not possess significant game consumption value but have considerable cold start value.

In the early stages, game project teams should gather seed users through PFP, land NFTs, etc., complete early game testing and cold starts, and provide early governance token rewards.

However, the true target players of the game should still focus on traditional game players, and the positioning of the game itself should help traditional game users transition smoothly into the Web 3.0 world. Therefore, the promotion strategy of the game should still be "first build consensus in Web 3.0, then break into Web 2.0." The activity and combat effectiveness of the Web 2.0 gaming professional player community often far exceed many so-called Web 3.0 communities.

Second, what kind of cooperation will you have with gaming guilds?

Intuitively, the necessity for Web 3.0 games to cooperate with gold farming studios is relatively low.

In traditional games, we need to make some distinctions regarding guilds. For professional player guilds, game project teams provide official support, while for gold farming studios, they implement restrictions such as account bans, controls, and reporting.

Currently, all guilds in the GameFi market are basically gold farming guilds, which is somewhat awkward, and the entry of gold farming guilds into GameFi 1.0 may not necessarily be a good thing. Gold farming guilds accumulate more production resource NFTs at relatively lower prices than ordinary players, rapidly producing game consumption tokens without consuming them in the game, purely creating more selling pressure. Gold farming guilds are not a positive role in the GameFi model.

Moreover, games also need to have certain mechanisms to counter whale players, preventing excessive wealth gaps from damaging the experience and stopping whale players from accelerating game consumption token production by hoarding more production resources.

Games in the GameFi 2.0 phase should still adhere to the principle of restricting gold farming guilds while encouraging more high-level player guilds and professional merchants.

The survival space for functionally singular gold farming studios will become increasingly limited, and they hold little cooperative value. In contrast, game guilds or data marketing platforms that can invest, participate in governance, provide operational assistance, conduct user education, and help expand the game community will have higher cooperative value in the early startup phase and may receive appropriate financial or policy support from the officials.

For MMORPGs, if guilds can cultivate more players skilled in management and commerce, they will be the most valuable partners for games centered around trading and assets. Alternatively, in the not-so-distant future, if guilds can independently purchase a piece of land within the game and establish their own game space, that would also be a development direction we look forward to.

Question 10: Open questions?

The greatest charm of Web 3.0 games lies in their indefinability; even now, we cannot imagine their full picture. We still have many questions seeking answers, such as:

• The gaming industry is highly complex, and the skill trees of gaming professionals differ significantly from those of blockchain project entrepreneurs. Is there still a need for traditional gaming giants to lead self-reform in the Web 3.0 gaming field?
• Or will native gaming giants emerge within Web 3.0?
• How should the technical design of interoperability issues involving NFTs balance on-chain and off-chain considerations?
• In the next cycle, will there be native stablecoins for games entering the mainstream market? Will Web 3.0, NFTs, and token incentive-driven communities create entirely new game types?

Special Thanks

Alex (@looksrare_eth), our Web 2.0 friend F, and Sarah from Impossible Finance and MixmarvelDAO Venture.