Yale University proposes the concept of ServerFi: a new symbiotic relationship between games and players after GameFi

Author: Pavun Shetty

Compiled by: Spinach Spinach｜bocaibocai

Preface

Spinach participated with real money in many Play to Earn games when the blockchain gaming boom just started, and ultimately lost almost everything. At that time, there was a clear feeling that the earliest players could reap the most benefits; they only needed to mine and sell daily to suck the blood of later players. New players, upon entering, had to buy at high prices while also finding ways to continuously attract new players, making GameFi essentially have only Fi without Game. This was not without issues related to token model design flaws. However, a recent paper from Yale University proposed two brand new token economic models and conducted a series of simulations, providing some new ideas for the sustainable development of GameFi.

Spinach translated Yale University's paper and extracted some highlights to share with everyone:

Abstract

Blockchain-based games have introduced a new economic model that combines traditional gaming with decentralized ownership and financial incentives, leading to the rapid rise of the GameFi sector. However, despite their innovative appeal, these games face significant challenges in market stability, player retention, and the sustainability of token value. This paper explores the development of blockchain games and identifies the main flaws in current token economic models through the lens of entropy theory. We propose two new models—ServerFi, which emphasizes privatization through asset synthesis, and a model focused on providing continuous rewards for high-retention players.

These models are formalized into mathematical frameworks and validated through collective behavior simulation experiments. Our findings indicate that ServerFi is particularly effective in maintaining player engagement and ensuring the long-term viability of the gaming ecosystem, providing a promising direction for the future development of blockchain games.

Introduction

With the continuous advancement of technology, the gaming industry has thrived on a journey filled with adventurers and outdoor enthusiasts[1]. Since the 1970s, Atari launched "Pong," an arcade ping-pong game that attracted numerous consumers during the tumultuous 1970s and sparked many inspiring imitation versions. With the emergence of more powerful microprocessors, dedicated graphics chips, and personal computers like the Commodore 64, it became possible to create complex, visually appealing games with rich sound effects. Following these pioneers, Nintendo quickly captured a large share of the console market with its home console, the Nintendo Entertainment System (NES), launching games like "Duck Hunt" and "Excitebike."

At the same time, Sega and Sony also became competitors with their outstanding offerings. Sega launched the Genesis and Game Gear, while Sony introduced the PlayStation 2 and 3, which were equipped with CD-ROMs for enhanced game storage, collectively defining the future of gaming consoles after 1994. The last significant milestone in game development was the wave of adoption of the DirectX API driven by Microsoft.

Online multiplayer games like "World of Warcraft" and "Fortnite" have fundamentally changed the way players interact and, propelled by internet technology, marked a leap forward for the gaming industry. These games have become cultural phenomena, allowing millions of players to share virtual worlds and fully enjoy the joys of technology. The rise of Google Stadia and Microsoft xCloud is also noteworthy. They stream games directly to players' devices, providing high-quality gaming experiences without the need for powerful hardware[2]. These groundbreaking innovations have brought players into a highly social and interconnected experience world, relying on the development of internet technology, undoubtedly pushing the gaming industry into the next era.

These visionary changes have refocused public attention on issues of decentralization and data ownership. In the traditional gaming era, players' data and assets were stored in a completely centralized manner on servers operated by gaming companies, even including virtual items purchased by players. The ownership of these controversial items was never in the hands of the players who bought them, influenced by classic economic models. This traditional model has operated for decades around player spending and company profits, with players' investments of precious resources like time and money yielding almost no returns aside from a few direct rewards. Commonly referred to as "walled gardens," these games host in-game items, characters, and currencies on developers' servers, preventing players from obtaining ownership of their accounts, content, and in-game assets.

This period has narrowed the scope of players' rights, despite their significant time and financial investments in the game, and has not generated any economic value for those who maintain the financial cycle's stability and sustainability within the game.

The emergence of GameFi has reshaped economic production relationships, bringing real-world incentives. When it comes to smoothly combining "gaming" and "finance" in a way that exceeds expectations, blockchain-based "Play to Earn" (P2E) games are well-prepared for a remarkable debut. Blockchain-based games typically create crypto assets in two mainstream ways: marking in-game items as NFTs and granting fungible tokens the status of in-game currency[3]. By combining traditional gaming with on-chain assets, these games achieve decentralized ownership, transparency, and tangible economic incentives for players. However, significant challenges remain in terms of market stability, player retention, and the sustainability of token value.

This paper first outlines the development background and pioneering cases of blockchain games. We then apply entropy theory to analyze the potential causes of current challenges and clarify the factors driving market dynamics. Based on these insights, we introduce two innovative token economic models: ServerFi, which achieves privatization through asset synthesis, and a model that continuously rewards high-retention players. These models are formalized into mathematical frameworks and validated through collective behavior simulation experiments. Our findings emphasize the potential of the ServerFi model in maintaining player engagement and ensuring the long-term viability of the gaming ecosystem.

Background: The Rise of GameFi

Blockchain-based games create crypto assets through two mainstream methods: marking in-game items as NFTs and granting fungible tokens the status of in-game currency. The year 2013 witnessed some key moments, such as the concept of Colored Coins proposed by Meni Rosenfeld, which sparked interest in the importance of virtual asset ownership and mapped real-world assets onto the Bitcoin blockchain[4]. Four years after Meni Rosenfeld, Larva Labs launched the CryptoPunks NFT series. This series marked a significant milestone in the development of NFTs and inspired the ERC-721 standard for digital art and collectibles on Ethereum through its 10,000 unique, randomly generated character images[5, 6].

NFT technology has undoubtedly been embraced by visionary founders. Dapper Labs launched the first blockchain game on Ethereum, called CryptoKitties, which congested the network in a short time, leading to significant transaction delays. In this game, players can buy, breed, and trade virtual cats, each with unique visual traits and varying degrees of rarity.

The immense success of CryptoKitties highlighted the appeal of NFT-based gameplay. CryptoKitties leveraged the psychological allure of real ownership and potential financial gains, attracting enthusiastic collectors and savvy investors through the in-game financial cycle, providing incentives to breed and trade rare cats, and creating a speculative environment. Discussions about CryptoKitties quickly became mainstream that year. This creatively designed GameFi game attracted millions of players, who not only owned these rare "kitties" but also gained social identity and a sense of belonging through the CryptoKitties community.

In the realm of NFT and "Play to Earn" (P2E) crypto games, Sky Mavis developed Axie Infinity as a significant successor to CryptoKitties, quickly becoming a popular game with its engaging gameplay loop, often keeping players hooked until late at night. Axie Infinity allows players to collect, breed, and battle fantasy creatures known as Axies[7]. Each Axie is backed by an NFT with unique attributes and abilities that can be enhanced through strategic breeding and gameplay[8].

This delightful GameFi game not only provides economic incentives similar to CryptoKitties but also introduces more complex game mechanics and a robust in-game economy. Its far-reaching design philosophy attracted a broad player base, setting new standards for the darlings of this era and establishing benchmarks for all future blockchain games.

Challenges of Token Economics and Our Solutions

Faced with significant competition from traditional network games running on centralized devices, blockchain-based games are accustomed to storing digital assets on the blockchain, allowing items owned by players to be sold or even transferred to other games or used in specific DeFi applications. Incentive models are gradually improving with the widespread adoption of blockchain technology. This opens up a new avenue for establishing cutting-edge production relationships between players and developers. The times have changed, and these innovations aim to reconstruct electronic society, holding the potential to thrive in the post-gaming era.

In light of these significant advancements, we must ask: In the context of the leap into the Web3 era, why would game developers choose a new production relationship originating from the GameFi field, where players' demands for assets vary, while traditional, casual gaming experiences are placed in a secondary position?

Most games have a certain lifecycle, and CryptoKitties is no exception. Among its key operational mechanisms, the breeding mechanism allows players to produce new "kitties," but this inadvertently increases supply, thereby reducing the rarity and value of individual "kitties" over time. As more players participate and breed "kitties," the secondary market quickly becomes oversaturated. This scenario is novel, sparking players' interest, but the dilemma is very familiar: how to maintain the price of circulating tokens? Without enough active players, demand cannot keep up with the growing supply, exacerbating the issue of devaluation.

As a result, individuals who invest significant time and resources in breeding may find that their output is diminishing. As the game collectively advances, the initial scarcity may lead to a loss of interest and reduced engagement among players due to the increasing abundance.

The application of entropy theory combined with token economics provides a professional and in-depth perspective to elucidate the dynamics of token flow and value fluctuations in blockchain projects. Entropy theory, based on the second law of thermodynamics, posits that in a closed system, entropy (a measure of disorder) tends to increase over time. This concept can be analogously applied to economic systems, particularly token economics, to enhance our understanding of token distribution, usage, and market volatility. In token economics, the initial distribution of tokens is typically orderly. At this stage, tokens are relatively concentrated, prices remain stable, and players' expectations are high[9]. Over time, more tokens are generated through game mechanics and enter the market. The increase in player trading and token flow subsequently raises the market's entropy (disorder). In this intermediate stage, internal chaos within the system surges, leading to high volatility in token prices.

Challenges that token economics may face include inflation triggered by an oversupply of tokens in the market and price instability caused by a surge of speculators. Without effective market regulation and incentive mechanisms, the system may reach a high-entropy (disorder) state, during which the value of tokens generally declines, and player engagement decreases. To maintain the long-term health of the system, it is crucial to have a way to connect new incentive mechanisms and regulatory measures. These actions can slow the increase of entropy, thereby maintaining relative order and stability in the market and sustaining player engagement.

We often view token economics as isolated events, such as a specific cause-and-effect leading to a single point of failure. However, from this perspective, the story is less about any one company and more about the global entropy increase of token circulation. Certain factors are always destructive, and certain gameplay mechanics always fail. Taking Axie Infinity as an example, its token economics design has several drawbacks from the players' perspective: first, Axie Infinity's token economy heavily relies on the continuous generation of new tokens (such as Smooth Love Potion, SLP). As more players participate and breed Axies, the number of newly generated tokens in the market increases, leading to a rapid expansion of the market's token supply. This imbalance between supply and demand causes the value of tokens to decline over time, devaluing the tokens held by players. Second, during the token generation event (TGE), many players and investors flood into the market, attempting to profit quickly through buying and selling tokens.

This speculative behavior can lead to significant price fluctuations, affecting market stability. In the long run, early speculators cashing out may cause token prices to plummet, adversely impacting ordinary players. Third, Axie Infinity's economic model lacks a sustainable incentive mechanism to maintain player engagement after the TGE. As the initial novelty wears off, players' enthusiasm may wane due to limited economic incentives. Addressing any flaws in the game helps attract new users and potentially increase token demand. Participating in Axie Infinity requires players to purchase Axies, which involves a high initial investment cost. This high cost poses a barrier to new players, limiting the game's accessibility and widespread adoption. Additionally, the market price of rare Axies can be exorbitantly high, making it difficult for ordinary players to afford.

Based on the discussion above, we propose two recommendations to improve GameFi token economic models:

ServerFi: Privatization Through Asset Synthesis

In line with the spirit of Web3, players can be allowed to combine their in-game assets, ultimately gaining sovereignty over future servers. This concept, called "ServerFi," involves players accumulating and merging various NFTs and other digital assets within the game to gain control over the game server. This form of privatization not only incentivizes players to invest more deeply in the game but also aligns with the decentralized and community-driven spirit of Web3. By granting players ownership and control over the game server, we can cultivate a more engaged and loyal player community, as they have substantial stakes in the gaming ecosystem. For example, we could design a game where players earn lottery chances daily based on their contribution value to the game server. Players can use these lottery chances to draw fragments. Once players collect all the necessary fragments, they can synthesize an NFT. By staking this NFT, players can share in the contribution value from other users to that game server.

Continuous Rewards for High-Retention Players

Another approach is for project teams to continuously identify and nurture high-retention players to maintain token vitality and ensure the health of the game ecosystem. By implementing complex algorithms and data analysis, projects can monitor player behavior and engagement, offering targeted rewards and incentives to those who demonstrate strong commitment and high activity levels. This approach ensures that the most loyal players remain engaged, driving sustained participation and interaction, thereby supporting the overall stability and growth of the game’s token economy. For instance, we could design a game that airdrops a portion of the game server's revenue daily to top users based on their contribution value to the system. This method would create a "Play to Earn" dynamic, rewarding players for their participation and contributions.

Experiments

To evaluate the effectiveness of our proposed token economic models, we conducted collective behavior simulation experiments for each model. These experiments aimed to compare and analyze the differences in value capture capabilities of blockchain games built on two different token economic frameworks. To model more accurately, we first formalized the definitions of these token economic mechanisms as follows.

ServerFi: Privatization Through Asset Synthesis

• Let vi represent the contribution value of player i in each iteration.

• The function f(v) = λv represents the number of lottery chances a player can earn through contribution value v, where λ is a scaling constant greater than 1.

• Assume there are k prizes in the lottery, with a probability of 1/k for drawing each card.

• Assume the number of new players on the first day is n, and considering the growth dynamics of the game, we define the number of new players in the i-th iteration as n/α(i−1).

• We assume that all players in the game are rational. Therefore, if players calculate that the cost of synthesizing an NFT exceeds the current staking rewards, they will choose to exit the game. Specifically, for new players, the expected cost of collecting all fragments is λ Σ(1/k). When this cost exceeds the staking reward of a single NFT, no new players will join the game.

• The total value of the system in the i-th iteration (day) is Ti = Σvi, where n is the number of players in the i-th iteration.

Continuous Rewards for High-Retention Players

• Let vi represent the contribution value of player i in each iteration.

• We stipulate that the system will reward the top 20% of players 80% of the total revenue based on their cumulative contributions over the past five days.

• We assume that all participants in the game are rational. Each player has a randomly initialized tolerance threshold, and if they fail to receive rewards consecutively multiple times, they will choose to exit the game.

• The total value of the system in the i-th iteration is Ti = Σvi, where n is the number of players in the i-th iteration.

Given the inherent randomness in real-world scenarios, our actual simulation experiments introduced random noise from various angles, including individual behavior and population growth. For example, we introduced mutation operators in individual modeling to capture the random fluctuations in participants' productivity within the game. To ensure a fair comparison between the two strategies, the experiments were designed with the same parameters in both experimental groups, such as maximum iteration count and initial population size. Each economic model's population underwent 500 iterations, with each experiment repeated 100 times. The experimental results are shown in Figure 1. The horizontal axis represents the number of iterations, and the vertical axis represents the total value contributed by players in each iteration. The light-colored band indicates the range between the maximum and minimum values, while the dark line represents the average value.

In the asset synthesis privatization model (left side), we observe a continuous upward trend in total player contribution value as the number of iterations increases, indicating that this model effectively maintains player engagement and drives long-term value growth. In contrast, in the continuous rewards for high-retention players model (right side), player contributions initially show a significant increase but then decline sharply. Although this model demonstrates high player contributions in the early stages, the subsequent decline in later iterations indicates challenges in maintaining player engagement over the long term.

Based on the modeling results, we believe that while the strategy of continuously rewarding high-retention players may drive significant engagement in the early stages, this approach inherently exacerbates player stratification in the long run. Specifically, this method may marginalize tail players due to a lack of sufficient positive feedback, ultimately leading to their exit from the game. This stratification phenomenon often sets a high entry barrier for new players. As a result, the decrease in new players, combined with the departure of tail players, reduces the rewards for existing top players, leading to a vicious cycle.

In contrast, the ServerFi mechanism introduces a degree of randomness through the fragment synthesis and lottery process, enhancing social mobility within the player community. For existing NFT holders, the continuous synthesis of new NFTs ensures that even top players cannot "rest on their laurels"; they must continually contribute value to maintain their status. For new players or those contributing less, there remain ample opportunities to synthesize NFTs and share in server rewards, promoting upward mobility. Therefore, the ServerFi model more effectively fosters social mobility among players, activating the entire system and cultivating a more sustainable ecosystem.

Conclusion

In this paper, we have delved into the challenges of token economics present in current blockchain-based games. The analysis indicates that traditional economic models often lead to market instability, declining player engagement, and unsustainable token value. To address these pressing issues, we proposed and analyzed two promising token economic models, with particular emphasis on the ServerFi model based on asset synthesis privatization. Through extensive collective behavior simulation experiments, ServerFi demonstrated significant potential in maintaining player engagement and ensuring the long-term sustainability of the gaming ecosystem.

Unlike traditional models, ServerFi effectively promotes social mobility among players by introducing a dynamic and competitive environment in which continuous value contribution is a necessary condition for maintaining status. This model not only nurtures a more vibrant and inclusive community but also provides a scalable and resilient framework for the future of blockchain games. As the industry evolves, the ServerFi approach may represent a significant shift in the structure of token economics, offering a more sustainable development path for the integration of decentralized technologies in gaming.