Author: YBB Capital Researcher Ac-Core

TLDR

• The two most mainstream design directions in GameFi currently are: AAA-level blockchain games focusing on playability and fully on-chain games that emphasize fairness and align with the spirit of Autonomous Worlds.

• The current pain points in the development of GameFi are: 1. Lack of playability, filled with speculation; 2. Insufficient industry regulation, with cryptocurrency traders being the main speculative players; 3. Complex on-chain operations, high barriers to entry, making it difficult to break into new user groups.

• The focus of GameFi is on playability rather than speculation, and it is not a competition with Earn.

• The concept of ServerFi mainly includes: ServerFi --- players can be allowed to combine their in-game assets to ultimately gain sovereignty over future servers; continuous rewards for high-retention players --- providing targeted rewards for high-retention players to maintain token vitality and a healthy game ecosystem.

I. The Current State and Pain Points of GameFi

Image Source: MPOST

During the last bull market from 2021 to 2022, the concepts of GameFi and P2E rapidly gained popularity with the rise of Axie Infinity, The Sandbox, and Stepn, leading to a surge of similar breeding games (such as Farmer World). However, due to the failed dual-token (governance token and output token) economic model and the design of NFTs (various items like pets, tools, and sneakers that can continuously generate tokens), the inherently Ponzi-like model was exposed, leading to the decline of P2E. The output side of the entire game far exceeded the demand side, quickly falling into a death spiral.

After several years of accumulation, the two most mainstream design directions in GameFi are: AAA-level blockchain games focusing on playability and fully on-chain games that emphasize fairness and align with the spirit of Autonomous Worlds. If we consider blockchain as the foundation of the world, it unequivocally preserves the collection of all node entities in its state. Additionally, it formally defines the rules of engagement through computer code. A world built on blockchain allows its residents to participate in consensus. They operate a computer network that reaches consensus each time a new entity is introduced.

--- "Analysis of the Core of Fully On-Chain Games: MUD Engine and World Engine"

1.1 AAA-level Blockchain Games:

Image Source: abmedia - illuvium

Integrating traditional gaming with blockchain technology: Web2.5 games represent an innovative form that lies between traditional games (Web2.0) and fully blockchain-based games (Web3.0). These games not only retain the core gameplay and user experience of traditional games but also introduce certain elements of blockchain technology, such as the verification of digital assets and decentralized trading among players.

Partial decentralization features: Decentralized elements are typically concentrated in specific functions or modules. For example, virtual items, characters, or currencies in the game may be managed and traded via blockchain, ensuring players' true ownership of digital assets. However, the main logic, operating environment, and most content of the game still remain on centralized servers, allowing for smooth game operation.

Higher performance and broad usability: Since Web2.5 games do not fully rely on the underlying blockchain architecture, they often outperform fully on-chain games in terms of performance and user usability. Support from traditional servers enables these games to accommodate a large number of players online simultaneously and provide richer and more complex game content, unhindered by the current throughput and response speed of blockchain technology. This design allows Web2.5 games to balance high performance with the innovative features of blockchain technology.

Balancing traditional gaming experience with blockchain advantages: Web2.5 games attempt to find the best balance between the immersive user experience of traditional games and the new features brought by blockchain technology. By incorporating decentralized asset management, transparent transaction records, and cross-platform asset circulation into the game, Web2.5 games not only retain the depth of gameplay and storytelling of traditional games but also provide players with new avenues for value acquisition and a higher sense of participation.

Combining AAA standards with blockchain games: Traditional AAA games are typically developed by large teams, featuring high budgets, high-quality graphics, complex storylines, and deep player interactions. AAA-level blockchain games further integrate the advantages of blockchain technology, allowing players to truly own and freely trade their virtual assets in the game while enjoying a top-tier gaming experience, creating a more realistically valuable gaming experience for players.

Wide support for various game types: Since Web2.5 games adopt an asset-on-chain model, theoretically, almost all types of games can apply this model, from traditional adventure games to strategy games, shooting games, and more. Currently, the most mainstream type of Web2.5 games is massively multiplayer online role-playing games (MMORPGs).

1.2 Fully On-Chain Games:

Based on the views from the 0xPARC collection of papers on cryptographic games titled "Autonomous Worlds," fully on-chain games must meet five key standards:

1. Data is entirely sourced from the blockchain:

The blockchain is not merely an auxiliary storage or mirror for data, but the sole source of all critical data. This means that all meaningful data should be stored and accessed on the blockchain, not limited to information like asset ownership. In this way, the game can fully leverage the advantages of programmable blockchain, such as transparent data storage and permissionless interoperability.

2. Game logic and rules are implemented through smart contracts:

Core activities in the game, such as combat logic, are not limited to ownership transfers but are fully executed on-chain through smart contracts. This ensures the transparency and credibility of game logic.

3. Open ecological development principles:

The smart contracts and client code of the game should be completely open-source, allowing third-party developers to redeploy, customize, or even fork their own versions of the game through plugins, third-party clients, or interoperable smart contracts. This openness fosters creative output from the entire community, enhancing the game's scalability and innovation.

4. Games are permanently stored on the blockchain:

This standard requires that games can continue to operate without relying on core developers or their clients. If game data is stored permissionlessly, logic is executed permissionlessly, and the community can directly interact with the core smart contracts, then even if developers exit, the game can continue to exist. This is a key standard for determining whether a game is truly crypto-native.

5. Interoperability between the game and the real world:

The blockchain provides an interface for the digital assets in the game to interact with real-world value. Virtual assets in the game can interact with other significant assets, enhancing the depth and meaning of the game and closely linking the virtual world with the real world.

Fully on-chain games built under these standards can be seen as "Autonomous Worlds" based on blockchain as the underlying architecture.

1.3 Addressing the Pain Points of Blockchain Games:

Image Source: Discovermagazine

The innovation of GameFi is the financialization of games, with the financialized gameplay being Pay to Earn; unfortunately, Pay to Earn is wrapped in a thick layer of Ponzi. Looking back at the entire history of video games, it began to emerge as a commercial entertainment medium in the 1970s, becoming a crucial entertainment industry in Japan, the United States, and Europe by the late 1970s. After the 1983 video game crash in the U.S. and the subsequent rebirth two years later, the video game industry experienced over two decades of growth, becoming a $10 billion industry that competes with the television and film industries, currently the most profitable visual entertainment industry in the world. After decades of game development, the models of games have been continuously replaced and changed. Today, moving games onto the blockchain still faces some significant pain points and challenges:

1. User demand points are unclear:

• It is undeniable that GameFi currently lags behind traditional games in terms of playability and gaming experience, although AAA-level blockchain games are continuously improving. For users, the Pay to Earn model of GameFi combined with a lack of playability leads to a dilemma between fun and profit; if neither is present, it will only accelerate their exit.

• Many current GameFi projects' economic models overly rely on token price fluctuations, and being subject to the influence of "crypto market conditions," if a token price crash harms players' interests, it will greatly affect player retention, leading to a loss of players and further accelerating the game's lifecycle conclusion.

1. Lack of regulation leads to loss of game traffic:

• Behind the financialization of GameFi games is the immature regulatory framework globally. This uncertainty exposes players to a certain degree of legal risk, and traffic pushing to break into new user groups will face obstacles, with retained players currently being speculative cryptocurrency traders.

1. Complexity of on-chain operations creates high barriers to entry:

• For non-cryptocurrency users, the entry barrier for GameFi is relatively high. Players typically need to be familiar with crypto wallets, token trading, and other blockchain operations, which is not user-friendly for the average player. This technical barrier limits the user expansion of GameFi, especially among traditional gaming player groups.

II. What Does Yale University's Paper on ServerFi Concept Say

Image Source: ServerFi: A New Symbiotic Relationship Between Games and Players

2.1 Concise Summary

Note: This section does not verify the source and authenticity of the paper; it merely refines and discusses the main points of the paper. The original text can be found in the extended link (1).

GameFi reshapes economic production relationships by combining "games" and "finance," achieving a new model of "play to earn" through blockchain. These games create crypto assets through NFTs and fungible tokens, bringing decentralized ownership, transparency, and player economic incentives. However, challenges remain regarding market stability, player retention rates, and the sustainability of token value. Compared to traditional online games, blockchain games leverage their unique digital asset storage methods and gradually improving incentive models to build new relationships between players and developers, driving the transformation of electronic society. However, in the context of the Web3 era, the traditionally relaxed gaming experience has been placed in a secondary position.

Most games have a lifecycle, and CryptoKitties is no exception. Its breeding mechanism increases the supply of "cats," gradually reducing rarity and value. As more players participate, the market quickly saturates, making it difficult to maintain token prices. Without enough active players, the imbalance of supply and demand will further exacerbate depreciation. Players who invest significant resources in breeding may find their returns diminishing, as the initial scarcity is replaced by oversupply, leading to decreased player interest and participation.

The non-essential parts of the original text discuss the development history of blockchain games (summarized as above), focusing on identifying the main flaws in token economic models through the entropy increase theorem. It proposes two new models: ServerFi and the continuous rewards for high-retention players model.

The entropy increase theory combined with token economics provides a profound perspective for understanding the flow of tokens and value fluctuations in blockchain projects. The entropy increase theory states that the level of disorder (entropy) in a closed system increases over time. This concept manifests in token economics as initially orderly token distribution, but as more tokens enter the market and transactions increase, market disorder rises, leading to price volatility and inflation risks. Without effective regulatory mechanisms, the system may enter a high-entropy state, resulting in token depreciation and decreased player participation. Therefore, it is necessary to slow down entropy increase through incentive mechanisms and regulatory measures to maintain market stability and player engagement.

For example, the token economy of Axie Infinity has several major flaws: 1. The token economy heavily relies on the continuous generation of new tokens (such as SLP), leading to oversupply and token depreciation; 2. Speculative behavior during the TGE period causes price fluctuations, affecting market stability; in the long term, after early speculators exit, token prices may plummet, harming the interests of ordinary players; 3. The economic model lacks sustained incentives, making it difficult to maintain player enthusiasm; 4. High initial investment costs also pose a barrier to new players, limiting the game's popularity.

Based on the above discussion, the original text proposes two suggestions for improving the GameFi token economic model:

• ServerFi:
  ServerFi aligns with the spirit of Web3, allowing players to synthesize in-game assets to gain sovereignty over game servers. This mechanism enables players to control servers by accumulating and merging NFTs and other digital assets, incentivizing deeper investment and enhancing engagement and loyalty.

• Continuous rewards for high-retention players:
  Project teams can monitor player behavior to provide targeted rewards for high-retention players, maintaining token vitality and a healthy game ecosystem. This approach encourages sustained participation and drives the stability and growth of the token economy. For example, a portion of server revenue could be airdropped to top users, creating a dynamic of "play to earn" that incentivizes players to continue contributing.

Model validation:
Yale University evaluated the effectiveness of these token economic models through group behavior simulation experiments, considering random factors in the real world (introducing random noise from various angles, including individual behavior and population growth).

The experimental results show that, as illustrated in the left side of the asset synthesis privatization model, player contribution values continue to rise with the number of iterations, indicating that this model can effectively maintain player participation and drive long-term value growth. In the continuous rewards for high-retention players model (right side), although initial contribution values rise significantly, they quickly decline afterward, highlighting the challenges of maintaining long-term player participation.

The original text suggests that while the strategy of continuous rewards for high-retention players can initially boost participation, it may exacerbate player stratification in the long run, marginalizing tail players and raising the entry barrier for new players, ultimately leading to a vicious cycle. In contrast, the ServerFi mechanism introduces randomness through fragment synthesis and lotteries, enhancing social mobility among players, where top players must continue to contribute, and new players also have opportunities to share rewards, thus maintaining the system's activity and sustainability.

Image Source: ServerFi: A New Symbiotic Relationship Between Games and Players

2.2 What Does ServerFi Essentially Convey Beyond Its Complex Narrative?

Breaking down the literal meaning and original explanation of ServerFi, "Server" translates directly to server, while ServerFi can be likened to a server network. In simple terms, its main purpose is to decentralize the ownership of rights, deepening the decentralized spirit of Web3, "shattering the server," and allowing players to collect in-game assets to ultimately gain sovereignty over future servers.

However, merely having ServerFi is not enough, so the continuous rewards for high-retention players mechanism is added. Simply put, the longer you play, the more "server fragments" you can collect. However, the original text does not explain whether "direct long-term consumption" or details based on game duration are needed. If players still need to continuously purchase related tokens to keep consuming and engaging in the Earn competition, its essence remains Play to Earn. Yet, this innovation still aims to reduce or improve the purely Play to Earn Ponzi gameplay and decrease speculative behavior.

In summary: The ServerFi + continuous rewards for high-retention players model essentially represents an improvement and innovation in the "design parameters" of GameFi's financial attributes.

III. Final Thoughts: Are GameFi and ServerFi Essentially the Wrong Direction?

Image Source: Shetu Network

3.1 Is Game Playability More Important Than the Earn Competition?

Undoubtedly, the importance lies in the playability of the game. The essence of a game is to provide players with an immersive experience; Earn is merely an embellishment. Without playability, Earn alone does not constitute a game but rather an electronic gambling slot machine. Maintaining an enjoyable gaming experience is key to attracting and retaining players, rather than relying on Ponzi-like short-term traffic bursts. If there is only Earn without playability, GameFi can only be a false proposition.

Economic incentives can only serve as an ancillary value to retain players, driving participation and attracting more people into the game. The Earn competition drives the in-game economy and token flow at its core, empowering players economically rather than binding them. The two aspects complement each other in GameFi; playability provides long-term appeal and a sustained player base, while the Earn competition attracts initial users and drives economic circulation. Therefore, the sole purpose of a game's long-term development is: to be fun.

3.2 What Narratives Do GameFi and ServerFi Each Convey?

GameFi narrates the Pay to Earn model of games on the blockchain, which exploded during the 2021-2022 bull market. The Ponzi craze brought about the rise of Axie Infinity, The Sandbox, and Stepn, but after the tide receded, it left behind devastation, memories of explosive traffic, and awakened innovations and attempts to move games onto the blockchain.

ServerFi narrates the improvement of the Pay to Earn model, aiming to reduce or improve the purely Play to Earn Ponzi gameplay and further decentralize the economic and system framework. Compared to the way in "Ready Player One" where players gain ownership through completing games, ServerFi is a method for long-term loyal players with strong financial attributes to acquire ownership.

Currently, the vast majority of innovations on the blockchain are essentially decentralized evolutions of financialization (or still derivatives of DeFi), and GameFi is no exception. Granting games strong financial attributes may not be inherently wrong; the challenge lies in how to effectively utilize blockchain as a double-edged sword with strong financial attributes. However, the narratives of GameFi and ServerFi remain focused on innovations at the level of economic model design. If they continue to promote the slogan of playing games to earn money, facing the inevitable future plummet of token prices, players will only lose money while playing games, ultimately accelerating the irreversible death cycle of the game. This would force GameFi to return to being a game, and games to return to being fun. We need to "design content to be enjoyable" rather than "design economic values," which may be the breakthrough path for GameFi.

Extended Link

(1) https://osf.io/5dq4k