Comparing the utility of single-token and dual-token models in crypto games

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

Author: Nat Eliason

Compiled by: Lu, WhoKnows DAO

01 Introduction

When I took over the design of a project team's tokenomics, the choice between a single-token model and a dual-token model became a common question.

Previously, my default answer was always to use a dual-token model, but I reflected on this behavior. I believe that every choice is reasonable as long as it can provide compelling reasons, and I will attempt to explain some nuances. By the end of our discussion, there may be a way for us to gain the benefits of both models.

The main area of focus in this article is gaming, and you can extrapolate these ideas to other crypto projects. Gaming is a superior sandbox environment for many projects because it has more utility scenarios for tokens.

Anyway, let's get started!

02 What is the Role of Tokens?

In games, the primary use of tokens is to enhance economic mechanisms that can only be realized through tokens.

Tokens are used for many things, such as speculation. As I mentioned in "Crypto Gaming is Broken," these uses can harm the quality or future of the game.

So, what new breakthroughs do tokens have in improving the economics of games? I believe the main method is achieved through a closed loop of microtransactions. If the value flow within the game is unidirectional and does not form a closed loop, they can only be used to unlock some additional value-added features. However, tokens create a bidirectional flow, allowing users to derive value from their gameplay. Those who invest a lot of time in the game can convert their time into capital, while players willing to invest money can, in a new way, convert capital into efficiency, saving time.

These transactions can take two forms:

In-app transactions: Players pay for battle passes, skins, treasure keys, or game progress.

P2P: Resources traded by players within the game. These could be NFTs, currencies, or anything else.

These transactions have existed in games for a long time. We are all familiar with trading and auction houses in games. The key difference that tokens can bring is the creation of a liquidity market between the game and "real currency," a way for players to exchange in-game currency for dollars in just a few steps.

In my view, other token use cases are secondary. This is not to say that other scenarios do not exist; what I mentioned above should always be the primary value of introducing token mechanisms into games.

What about other use cases? Tokens should primarily be used for fundraising, and another speculation could be governance, which can also serve as a utility scenario for tokens. From a speculative perspective, cash flow and ownership also count as a form of ownership. However, we should realize that the introduction of tokens is not to make games more fun but to provide financial support for the games. The next question should be whether we can find a way that benefits both the game and the community, or whether this model will always end up conflicting with the vision of creating a good game.

We will start with the dual-token model, as it is currently the most popular and common approach.

#03 Dual-Token Model

This was pioneered by Axie Infinity, which has two tokens: AXS (governance token) and SLP (in-game consumption token).

The supply of AXS is fixed, meaning it can accumulate value over time, while the supply of SLP is unlimited; they can be minted and burned as needed to balance the game.

In this model, AXS is essentially a security measure. Additionally, AXS can be seen as the stock of the issuer; of course, the team cannot really say that, but that is what they are doing. Governance is often a facade to bypass security. SLP is the real game token, as it is relied upon for most of the economic operations in Axie Infinity.

Advantages of the Dual-Token Model

The greatness of this model lies in the ability to separate speculative demand from game economic demand. When you release anything using crypto technology, people will speculate for quick and substantial returns. One token is used for speculation, while the other is used for in-game economics. Separating these two demands minimizes the risk that a surge in speculation will lead to a price spike within the game. You would not want to see a surge in speculative behavior causing sudden price increases in the game.

This also makes fundraising easier; investors want to invest in a token with a fixed supply because it may have reasons for price appreciation over time. A game token with a variable supply is not a good investment target because the operators can adjust their supply, burn, and use cases at any time. Moreover, to balance the game, they may need to push the token's value in one direction or another.

The dual-token model is common; people see that Axie follows this pattern, and other games do the same. So they intuitively feel that one token is for investment and the other is for gaming. This is also similar to our view of fiat currency, where gold and Bitcoin are assets you hold, while the dollar is the currency you spend.

Disadvantages of the Dual-Token Model

When a game's popularity is soaring and the market is booming, the dual-token model seems perfect. The price of the in-game token remains relatively stable, while the price of the other token steadily rises, providing a thrill of speculation.

However, when the game's heat fades like music coming to an end, people will start to think: what is the point of this governance token? Users are unlikely to hold a token worth millions of dollars just for voting rights; they need more utility.

The emergence of this question is a significant drawback of the dual-token model. There are several ways to attempt to address this issue:

What is a Fixed Supply Token?

Having a token purely for speculation ultimately leads to the question, "Hey, why should we hold this?" Speculation is not a reason to keep the token price rising; there must be other factors at play.

Some teams try to add cash flow, typically through staking. There are two paths to achieve this:

Dilution protection: You can stake your tokens to receive more of the same tokens. This is not true cash flow; it is merely dilution protection because more tokens are unlocked. But at least it looks like "free money."

Dividends: Players can receive some of the tokens spent in the game. However, this is difficult to do fairly because if you redistribute the funds collected through application transactions, then the transactions that should act as a conduit no longer serve that purpose. They turn to use Ponzi economics. Therefore, you can only earn fees from P2P transactions.

The dividends from P2P transactions can also be quite substantial. For most of the past month, STEPN's daily transaction fee revenue ranged from $2 million to $3 million. At that time, there were 600 million GMT in circulation, assuming a staking ratio of 1/2. If they split the transaction fees with GMT holders, then $1 million would flow into 300 million GMT equity, which is about $0.003 per token. Given that the average price of GMT is $1.50, this amounts to a daily dividend of 0.2% or a 73% non-dilutive annual yield. Incredible! They did not do this, but it does indicate that the dividends from peer-to-peer transactions can be significant.

If a team does not want to increase cash flow, or if they want to add something beyond cash flow, they will add in-game use cases for fixed supply tokens.

This is what Axie ultimately did by introducing breeding costs for AXS. In this case, the fixed supply token becomes an additional in-game currency, except that it is a fixed supply token. Game designers can choose whether they want these used tokens to be burned or recycled and use it as an additional check mechanism for the game economy.

Designing use cases for fixed supply tokens is tricky, but what are the reasons people choose them?

You can draw boundaries anywhere, but it usually becomes somewhat arbitrary. There are good arguments to support it as a market trading token or as an application trading token.

I believe that if a team wants to increase the use cases for fixed supply tokens, then this form of utilization should impact the token's supply. The purpose of increasing use cases is to bring value to the fixed supply token, but if they are used as a currency like an unlimited supply token, then there will be no ongoing reason to hold it. Because you can buy when you need it and sell when you don't. However, if the fixed supply token can be used for special upgrades that are burned in the game, then as the game becomes popular, both the fixed supply token and upgrade assets will become increasingly valuable.

Teams that adopt the dual-token model will ultimately encounter this dilemma unless they find a way to increase the value or utility of the fixed supply token; otherwise, these tokens will be sold off by many investors, and your project will be abandoned.

What about the single-token model?

04 Single-Token Model

Projects that use only one token are rare, but this approach offers some opportunities to solve the problems of the dual-token model.

It is essential to remember that a single-token model does not mean there is only one token in the game; there can be multiple tokens within the game, but only one exists as a bridge between the game and cryptocurrency.

There are several ways to achieve this:

Variable Supply Single-Token Model

One way is to use a single-token model where the token's supply is variable. I have not yet seen a good example of this, but as a game token model, it can strictly adhere to the ideas I proposed in "Crypto Gaming is Broken Piece."

This goes back to my point at the beginning of this article. The role of crypto assets in games is to allow people to exchange their in-game work for money outside the game.

If a game studio wants to achieve this without interfering with complex token economics, here is a very simple method.

1. Build a fantastic game using an in-game market (e.g., Runescape, WoW, etc.)
2. Establish a bridge between the core currency and the blockchain
3. Add liquidity to that currency with another token (ETH, USDC, etc.)

There you go. You have launched a crypto game; it seems simple, but it is everything we need. Imagine Runescape having a highly liquid Gold <-> USDC market. That would be amazing, right?

You don't even need to make items NFTs because, frankly, game items will have no value once they leave the game. Just maintain a normal auction house function where players can trade everything with tokens, add a withdrawal channel, and a thriving, awe-inspiring crypto game is born.

Why haven't we seen such examples? Because making fun games is very difficult. Some games have adopted this approach, but most have not yet launched. When they do release, it will become even more challenging for them to gain attention because they won't have an exciting Ponzi structure on top. If we are honest, those Ponzi-modeled games are a good GTM strategy that can generate massive traffic initially.

Another downside of this model is that people have no speculative targets. At least for now, it seems that to succeed in the crypto space, some speculative opportunities are indeed needed. If investors do not have some fixed supply assets to hold long-term with hopes of value appreciation, it will be challenging for them to raise funds from these investors.

So, let’s next look at a fixed supply single-token model.

Fixed Supply Single-Token Model

Can you create a crypto game with only one fixed supply token? This is the route taken by earlier launched crypto platforms, such as Sandbox and Decentraland. I believe this model may become popular again as an iteration of the dual-token model.

Here is a method you can try; this is a hypothesis, and I am still thinking about how to implement it, so please do not assume it is usable or just copy and paste it.

In this model, there exists a fixed supply single-token model as an investable asset and a bridge for all funds in the game.

However, you still need a more variable supply currency in the game so that you can better balance the economy. So you still have a variable supply token; it is just locked in the game.

Then create a DEX between the in-game variable token and the fixed token, linking any other in-game assets. This is actually a better trading technology, like exchanging wood for tokens, because it creates a liquidity market similar to Sushiswap or Uniswap, allowing for immediate trading of anything without needing a buyer on the other side.

This way, players can trade fixed supply tokens with in-game currency at any time, facilitating transitions. Or they can use the fixed supply token as a bridge to purchase gold, wood, and other things they want.

Since the supply of the fixed supply token is fixed and the in-game items will inflate, the purchasing power of the token should increase over time rather than diminish. Early players will receive more rewards from their labor, leaning towards the fixed supply token rules, while later players can still play and earn.

Additionally, separating from the resource market, you can have an item market. These items can be extracted as NFTs or locked in the game. I see no difference. Everything in the market can be priced with the variable supply token, and then transaction fees go into the treasury or are burned. If you burn it, then over time, you will create some deflation, which will also help create more value for the fixed supply token.

Another method is to price the item market tokens in a major crypto asset (like ETH). The significant advantage here is that the in-game trading token is an asset not tied to game performance. If you charge transaction fees on your token, you still have to sell the token to the market to generate income. If you charge transaction fees in ETH, SOL, or USDC, then the income will be immediate.

This also requires players to connect other assets in the game, such as ETH, SOL, or USDC, which will be stored by the project team. The project team can earn returns while holding these assets, creating an additional revenue stream for the game.

So the question is, how does the fixed supply token appreciate? Here you can reintroduce a dividend model, but the dividends are paid in assets used in the market. Thus, by staking my fixed supply token, I earn some ETH or USDC in the game without being burdened by some complex on-chain staking system. This would be very cool, and I have not seen any games attempt this method. However, legal compliance may be quite complex.

Then you can also allow it to earn some dividends from the transaction fees of all other swap transactions. Therefore, by staking your tokens in the game, you earn some ETH, some in-game currency, and some more tokens from all transactions happening in the game. This would make it an extraordinary investment asset, with purchasing power increasing over time due to inflation, and the value of the token will rise. If you add some high-value burns on top, you will have a very strong token investment thesis.

Through my thoughts on this model, I believe it is much more powerful than the currently popular dual-token model. It adds a lot of flexibility and ensures that a core asset accumulates value within the ecosystem. If you merely want to link the game and the crypto world, a variable supply single-token model would be ideal. But this fixed supply single-token model allows you to retain the more speculative side of cryptocurrency while also bringing value growth over time.

This is purely theoretical and will certainly need some improvements. However, I hope this helps any team trying to think about how to build token economics. I will continue to refine this and iterate on it as I explore more games and collaborate with more teams.