Exploring GameFi Economics: Where Should the Two New Vessels of 3A Chain Games and Full-Chain Games Go?

Author: YBB Capital Researcher Zeke

Introduction

Since the decline of the P2E (Play to Earn) model in GameFi, there have been numerous disagreements regarding the design of GameFi. The two mainstream design directions are: AAA-level blockchain games focusing on playability, or fully on-chain games that emphasize fairness and align with the spirit of Autonomous Worlds. With the recent explosive growth of both ecosystems, the blockchain gaming sector has finally emerged from a long winter into a long-awaited spring. As one of the hottest sectors today, discussions around different carriers of GameFi (from game types to on-chain and off-chain) are among the main topics in the industry. However, this article will not discuss which of the two carriers is superior, but rather how the core of GameFi, "Fi" (economic system), is presented in top traditional games, and what direction the two new carriers should take.

Definition of GameFi

The early definition of GameFi typically referred to blockchain games that provide economic incentives for players to earn while playing. Players can usually earn cryptocurrency and NFT rewards by completing tasks, battling other players, and leveling up, with in-game items being unique NFTs owned by the players. Since the rise of Axie Infinity, the concepts of GameFi and P2E have rapidly gained popularity, with similar breeding games (such as Farmer World, STEPN, etc.) springing up like mushrooms after rain. However, due to the failure of the dual-token (governance token and output token) economic model combined with NFT designs (pets, farming tools, running shoes, etc.) that continuously generate tokens, once there are no buyers, the output of the entire game will far exceed demand, quickly leading to a death spiral. The lifecycle of such games is typically short, lasting only a few weeks to a few months, and at that time, the term GameFi was almost synonymous with Ponzi schemes. The subsequent mainstream direction first aimed at improving AAA production and playability, hoping to attract Web2 players through high-quality game experiences and achieve a paid game economy. Currently popular games like Big Time and Illuvium, in which YBB was an early investor, are early representatives of such AAA blockchain games.

Another direction that has only recently gained popularity is fully on-chain games. Although the history of fully on-chain games can be traced back to the 10-year-old Huntercoin, the experience of fully on-chain games was relatively poor due to early technological limitations, making it a very niche category. Now, with the continuous development and improvement of infrastructure such as Rollup and fully on-chain game engines (MUD, DOJO), the feasibility of this concept has gradually matured and begun to gain traction among some core industry figures. However, current fully on-chain games are still in their early stages and face many design issues.

The definition of GameFi is now also beginning to shift towards Web3 games (fully on-chain games) and Web2.5 games (currently mainly AAA blockchain games, of which the vast majority of past blockchain games also belong to this category). The main difference between the two lies in the degree and manner of blockchain technology usage, with the specific definitions as follows.

Fully On-Chain Games

(Definition based on the views in "Autonomous Worlds," for more detailed content, please refer to our fully on-chain game article "Analysis of the Core of Fully On-Chain Games: MUD Engine and World Engine" https://medium.com/ybbcapital/analysis-of-the-core-of-fully-on-chain-games-mud-engine-and-world-engine-80b41d6abb):

• Data sourced from the blockchain: The blockchain is not just an auxiliary storage for data, nor merely a "mirror" of data stored on proprietary servers. All meaningful data can be accessed on the blockchain, not just asset ownership data. This allows games to fully leverage the advantages of programmable blockchains—transparent data storage and permissionless interoperability;
• Logic and rules implemented via smart contracts: For example, battles in the game, not just ownership, are conducted on-chain;
• Game development follows open ecosystem principles: Game contracts and accessible game clients are open-source. Third-party developers can achieve complete redeployment, customization, or even forking of their game experiences through plugins, third-party clients, and interoperable smart contracts. This, in turn, allows game developers to utilize the creative output of the entire (incentive-aligned) community;
• Games permanently stored on-chain: This is closely related to the above three points, as the litmus test for whether a game is a crypto-native game is: if the client provided by the core developers disappears tomorrow, can the game still be played? The answer is often yes, if (and only if) the game data storage is permissionless, if the game logic can be executed permissionlessly, and if the community can interact with the core smart contracts without relying on interfaces provided by the core team;
• Games can interoperate with things we consider valuable: The blockchain provides a local application interface for the concept of value itself, allowing digital assets to interoperate with other assets we care about by default. This reflects the depth and significance of the game, helps enhance the depth and significance of the game, and connects the game world with the "real" world;
• Supported game types: Since these are fully on-chain games, they are only suitable for game types that do not require low-latency environments, such as turn-based RPGs, puzzle ACTs, simulation games, adventure games, card games, management games, sandbox games, and gambling games;

AAA Blockchain Games:

• Combining traditional games and blockchain technology: AAA games are a transitional form between traditional games (Web2.0) and fully blockchain-based games (Web3.0). They typically combine characteristics of traditional games with certain blockchain elements;
• Partial decentralization features: These games may include decentralized elements, such as using blockchain to manage game assets or player transactions, but other parts of the game, such as game logic and operating environment, are generally centralized;
• Higher performance and usability: Compared to fully on-chain games, AAA games may offer better performance and broader usability since they do not rely entirely on the underlying blockchain architecture;
• Balancing traditional gaming experience and blockchain advantages: AAA games attempt to find a balance between the user experience of traditional games and the new features brought by blockchain (such as asset ownership and transparency);
• AAA: In the traditional sense, AAA games refer to those with high budgets, high-quality graphics, deep storylines, and fine production. These games are usually developed by large gaming companies and provide top-notch gaming experiences. The so-called AAA blockchain games are Web2.5 games that meet this standard;
• Game types: Since the asset-on-chain model is used, theoretically all game types are supported, with the currently most mainstream game type being MMORPGs (Massively Multiplayer Online Role-Playing Games), which is also the main type we will discuss later.

Overview of Token Models

The token models of blockchain games can be roughly divided into two categories. In addition to the dual-token model mentioned above, there is also a single-token model (which is currently more commonly used). We will provide a brief overview of both models.

Single-Token Model: This model has only one token, and the economic cycle relies entirely on this single token. Games like Crypto Zoon, Playvalkyr, Hashland, and Big Time adopt the single-token model, which is essentially similar to traditional gold-farming MMORPGs, but with the introduction of a single token, four different modes have emerged.

Four Modes of the Single-Token Model:

• Mode A (Gold Standard In + Token Standard Out): Purchase NFTs using USDT, BNB, ETH, etc., and earn tokens (TokenA) through gameplay. The entry threshold is fixed, and returns fluctuate with token prices;
• Mode B (Gold Standard In + Gold Standard Out): The entry threshold is fixed, and returns are fixed daily. This mode maintains a stable return cycle when token prices rise, and players receive a constant gold standard return when token prices fall;
• Mode C (Token Standard In + Token Standard Out): Both the entry threshold and returns fluctuate with token prices. This mode significantly increases returns for old players when token prices rise;
• Mode D (Token Standard In + Gold Standard Out): This mode is currently hardly adopted by any projects and is unfriendly to both project parties and players.

Dual-Token Model: This model consists of a parent token and a child token, where the parent token typically serves as the governance token for the game, and the child token acts as the in-game economic token. A representative of this model is Axie, which introduced the child token SLP to absorb the selling pressure of the original single-token AXS. Most of the output in the game is primarily in the form of the child token, with the parent token as a supplement.

Modes of the Dual-Token Model: Most new dual-token models adopt a token standard in and token standard out mode, such as BinaryX's parent token in and child token out; Starsharks' child token in and child token out. Under this model, the flexibility of model adjustments is strong, and it does not require the semi-centralized adjustments needed in gold standard models. However, the issues with this internal circulation model have been briefly described above, and current blockchain games have largely moved away from this model.

Economics in Games

Games and economics may seem like two entirely different fields, but in reality, there is a close connection between the two. Economics studies choices under conditions of scarcity, and one perspective on game motivation is economic in nature. When a game functions as a virtual economic system, players need to maximize their utility through microeconomic behavior, while the game itself requires macroeconomic theory to establish a stable economic system that maximizes lifecycle value.

Economics was originally built on the most primitive rules of trade, and it can be said that economics stems from trade. Similarly, for games, even though it is a completely virtual world, as long as a trading market is opened and players are allowed to freely buy and sell (either among themselves or with NPCs), an economic ecology will inevitably form. In the past P2E era, games had relatively few elements, leading to a simpler and more fragile economic ecology (essentially providing only the basic elements needed for mining, withdrawal, and selling). Now, with the maturity of AAA blockchain games, as the elements and composition of games become more complex, the resilience and plasticity of their economic systems will greatly improve, especially for existing mainstream MMORPG blockchain games. Although there is a mainstream opposing view that the current playability of blockchain games is insufficient to create an economic system like traditional games, I personally believe that both points are equally important and complementary. Because even a highly playable game can die due to economic collapse (such as Miracle MU, Legend of Mir, Diablo 3, etc.), but an average game in its early stages can continuously iterate alongside an excellent economic ecology, allowing the game to become a healthy "developing country" and gradually improve its playability.

Therefore, how to build a reasonable economic ecology remains a key issue that most blockchain games must consider. The so-called token model is merely the most basic framework of an economic model, and the macro design of game elements is the next area that needs improvement. From an economic perspective, the act of players playing games in the game world is no different from humans engaging in social activities in the real world; essentially, both are economic representations and laws of the real world mapped onto the virtual world. In the game world, when players enter this virtual world as game characters, they exhibit various microeconomic behaviors: choices, cooperation, and gamesmanship, etc. Players need to engage in behaviors around the allocation of scarce resources in the game to achieve maximum utility. On the other hand, in this artificially constructed game world, various principles of macroeconomics are also present: resource scarcity, supply and demand of goods, and monetary systems, etc. Because the game itself needs to guide its policy formulation and implementation through macroeconomic phenomena and laws to maintain a healthy economic ecology and maximize the lifecycle value of the game. If AAA MMO blockchain games are to find a target for learning economic structures in traditional games, then the stable survival of the game economy in Dream of the Red Chamber, which has lasted nearly 20 years, is undoubtedly the most classic case.

Dream of the Red Chamber

"Dream of the Red Chamber" is an online game developed and operated by China's NetEase (released on December 18, 2003). This game is set against the backdrop of the classic novel "Journey to the West" and creates a romantic game atmosphere through Q-version character designs. The game has over 250 million registered users and has opened more than 400 paid servers. The characters in the game are divided into three races: Celestial, Human, and Demon, with each race containing six character styles and six different sects to choose from, totaling 19 sects. Players can complete various tasks to level up and earn rewards, such as challenging the 28 constellations of the Heavenly Palace to win gems and other prizes, or completing sect tasks to gain double experience and monetary rewards. From the perspective of economic system design, Dream of the Red Chamber is similar to the B-type in the single-token model mentioned above, and its overall core mechanism can be divided into three points: reservoir, value anchor, and reserve fund mechanism.

Reservoir:

Developers' macroeconomic regulation mainly focuses on two major aspects: input and recovery. However, since the main participants in the economic system are players, who exist as both producers and consumers, it is impossible to adjust the internal operation of the economic system solely through these two aspects. Thus, fluctuations on both the supply and demand sides within the system lead to relative oversupply.

Relative oversupply refers to the imbalance between supply and demand in the short term, resulting in either relative oversupply or relative demand oversupply, primarily manifested in price changes. In an MMORPG development game like Dream of the Red Chamber, the demand for game currency and items corresponding to all development items is relatively fixed, and there are no "substitutes" to address demand oversupply. The inability of intermediate products resulting from oversupply to circulate effectively can easily lead to negative player experiences, which is also a common issue in blockchain games.

Such situations become more severe for "high-end" demands. Taking the high-level weapon appraisal market in the game as an example, the production chain of high-level weapons requires a significant amount of game time, low-level equipment, and various materials, resulting in each weapon being quite expensive.

Additionally, due to the existence of random attributes and a high depreciation rate in the recovery system, if a "garbage" item is appraised, players lose everything. This makes the consumers in this market primarily whale users (commonly known as bosses). Due to the long production chain and high product value, this market's relative oversupply arises. The continuous output from "laborers" and the temporary, large-scale demand from bosses create a clear contradiction. If the redistribution link is not increased, it will lead to a dilemma where either players' output has nowhere to go or bosses' demands cannot be met.

In summary, to cope with such situations, the game needs a "reservoir" to accommodate these temporary surpluses. Interestingly, the two major "reservoirs" in the game come from the developers' system design and the natural evolution of the economic system itself. The reservoir for game currency is a special bank, while the reservoir for items is merchants. The special bank system is easy to understand; it absorbs and stores excess game currency supply and provides it for exchange when the market needs game currency supply. This system can also stabilize the economic system by limiting the total amount of game currency that can be exchanged within a specific time frame.

Merchants are also a type of player that inevitably exists in games adopting a "free market economy model." They can be said to be a profession that arises whenever there is profit to be made. In the economic system of Dream of the Red Chamber, all profits made by merchants are essentially extracted from the developers, and the reason they are allowed to earn these profits is that they take on the functions of "reservoir" for items and resource redistribution, becoming an indispensable part of the economic system's operation.

Theoretically, merchants that bear more inventory costs are allowed to have higher profit margins. When we discover some merchants that appear to have high profits, we must consider their inventory costs for a comprehensive analysis, often revealing that their "excess profits" are still within a reasonable range.

Value Anchor:

The second major loophole is the risk of monopoly brought about by limited short-term system output. The cost and difficulty of achieving monopoly over a certain module in the game are relatively low, and a large number of monopolistic behaviors can lead to a very unhealthy economic ecology, thereby affecting the gaming experience and game revenue.

The solution is simple: provide official value anchors. Since the value of in-game items is essentially equivalent to the average consumption of point cards required to produce those items, we can see that even if the conditions of different servers vary, the price fluctuation range of most items is relatively consistent.

In other words, if there is an official store selling items at their average expected prices, as long as the frequency and total output are controlled, it can increase revenue while preventing monopolistic behavior and stabilizing the economic system. Such attempts existed when Dream of the Red Chamber was born, with the simplest examples being buns priced at 100 each, books for 3000 for 40 stamina, and flying talismans for 500 each. Through these anchors, including stamina/vitality, most resources have stable official pricing, thus avoiding the risk of operational monopolies.

The ultimate form of the anchor may be the pocket version of Dream of the Red Chamber, where players can obtain most intermediate products of the production process by consuming point cards. We can also see that these products have very stable official pricing, making this system an important cornerstone for the stability of the economic ecology in Dream of the Red Chamber.

Reserve Fund Mechanism:

Ultimately, Dream of the Red Chamber is a development game. When all surplus labor value can circulate in the market, it contradicts the essence of the game and also brings the risk of excessive profits being taken by studios. Thus, the reserve fund mechanism was born, which allows a portion of players' labor value to be deposited into character attribute development. When players' game output is converted into reserve funds, the developers' income is considered secure.

At the same time, even if a portion of the game's revenue comes from transaction taxes, it still controls the circulation frequency overall. Various types of time locks and high-value item trading restrictions are not only meant to protect players' assets but also serve to control circulation frequency. The Three Realms Merit system is a culmination of this idea, creating a solid foundation for the prosperity of Dream of the Red Chamber in recent years.

There are many "professional/semi-professional players" in Dream of the Red Chamber who can earn some income through the game, which also becomes their main motivation for playing. For developers, distinguishing between acceptable normal players and large-scale toxic studios is challenging. A blanket ban on all cash-generating outlets is also unfeasible, leading to the creation of the Three Realms Merit system.

The design idea of this system is to introduce a new resource into the resource flow process of players' gaming experience and to encourage normal players' daily gameplay while restricting the abnormal gaming behaviors of studios by controlling the generation and consumption of this new resource. In simple terms, in the chain of "purchasing point cards - playing the game - producing items - exchanging for cash," actions closer to the right will consume Three Realms Merit, while actions closer to the left will earn Three Realms Merit. Additionally, a small amount of Three Realms Merit will be allocated to encourage normal players' daily gameplay (such as reserve fund ghost-catching and sect tasks), although such allocations are also limited daily.

Summary

Although the economic system is not everything in a game, Dream of the Red Chamber has crafted an almost perfect answer by combining game content design. How to cleverly design mechanisms to maintain account vitality, ensure trading order, and regulate supply-demand balance, so that every participant in the game world (including the project party itself) can get what they need, is something we can learn from. Having discussed the representative of traditional games, let us now look at the current state of blockchain games.

AAA Blockchain Games

From the existing AAA blockchain games, Big Time is actually a game that is continuously improving and moving closer to a sustainable economic ecology, although everything seemed rough in the early versions of the game. This aligns with the earlier statement: "Even a highly playable blockchain game can die due to economic collapse, but an average game can continuously iterate alongside an excellent economic ecology." Big Time has revitalized its entire economic model through strict centralized control. Although it has not yet achieved the economics of skin markets, the current revenue model of the game is quite similar to traditional games. Big Time's revenue sources include three points: transaction fees from buying and selling, nearly monthly sales of blind boxes, and sales of consumable items (crystals). Coupled with adjustments in various data, the output tokens can maintain low inflation and increase, achieving a delicate balance between the project party and gold-farming players. While ensuring game revenue, the project party can continuously optimize adjustments and add new content to enhance playability, attracting more diverse players. Perhaps this traditional MMORPG-like approach will be the correct path for Web2.5 games.

Fully On-Chain Games

In previous articles, we explored the significance of the development of fully on-chain game technology for blockchain from a technical perspective. Today, let's consider what kind of economic model is suitable for fully on-chain games. Currently, fully on-chain games generally lack tokens or in-game output tokens for two main reasons: first, fully on-chain games are still in their early development stages and have not yet determined what types of games are suitable. Second, due to the completely on-chain nature of fully on-chain games, centralization is difficult to intervene and regulate. Once an economic model has vulnerabilities, the entire game can collapse instantly and irreparably.

So, can fully on-chain games not achieve long-term development through economic ecology? Not necessarily. Although I do not have a definitive answer, I personally believe that fully on-chain games can attempt an NFT-led economics model. For example, the ANOME protocol uses a gold standard pledge to mint NFTs, decoupling Game from DeFi through a Stake to Mint NFT model. This allows the project party to obtain funds and generate continuous income through DeFi, while players can obtain NFTs for free and receive dividends, which may become a new economic model.

Conclusion

In fact, I am a deep console game player and have always believed that transforming games or empowering games with light applications like Friend Tech is the best way for blockchain games. When I first heard of the concept of AAA blockchain games, my instinctive reaction was quite resistant. Players familiar with AAA games should understand that the production costs (ranging from 600 million to 4.2 billion) and cycles (approximately 3-5 years) of top AAA games are so exaggerated that failing once can bring a leading game company to the brink of bankruptcy. Achieving such project production in a bottom-up industry sounded a bit like a fantasy to me at the time. However, the resilience of Big Time and Illuvium during the bear market and their recent turnaround have led me to reconsider this model. Perhaps AAA blockchain games can find some balance through economic models to achieve longevity and ultimately iterate out games that can open the doors to Web2. Similarly, fully on-chain games are currently facing skepticism, just like past AAA blockchain games. However, as a famous saying goes, "Those who never win rarely fail, and those who never climb rarely fall." A new paradigm will inevitably be accompanied by doubts and failures before it emerges, which is a normal occurrence.