Author: @BriefKandle, ResearchDAO

When Compound started its governance tokens launch, Compound forking started the DeFi summer. At the beginning of 2021, DeFi protocols have been gaining liquidity and increasing their TVLs dramatically, but their governance token price sometimes does not reflect the market upward. The market was flooded with yield farming schemes with no APR too high. Governance tokens are rewarded as incentives to lure new players in. Simply stake your liquidity provider (LP) tokens to earn a nice APR reward along with trading fees auto-compounding three times a day. Then the selling pressure came to correct the protocol’s previous over-inflationary monetary policy with impermanent loss wiping out all the previous gains which were, by the way, measured in the price of the token of inflationary supply. Some protocols only exist for less than a month. The market for retail investors was hysterical.

Haters call forked protocols Ponzi schemes with extra steps. Or, according to Rick’s salty comment, it is a slavery system established by early participants on late-comers, you know, the car battery residents. The problem with the modern-day slavery system is that it cannot be too obvious for participants to realize how it works, a very daunting mission when online information is abundant and the illiteracy rate is low. Therefore, a combination of misinformation campaigns, deliberate asymmetry of information, and some novel narratives of value accrual mechanisms is often deployed to maintain the system, the same as how the multi-dimensional car battery is maintained.

As to some DeFi protocols, it becomes problematic when market participants started to realize the initial high APR enabled by the inflationary governance token issuance could be unsustainable. It exacerbates when the community consensus fails to find utility for its protocol governance.

The obvious solution is to add an additional element to obfuscate the already-exposed problem. However, launching new staking pools, announcing more partnerships, and selling crypto lands, which is another form of interest-earning asset, do prolong the project livelihood, but are not feasible practices to solve the sustainability problem. What GameFi needs is a new way of thinking, both product-wise and community-wise. The following sections will discuss the two directions GameFi protocols will be taking: one emphasizing on the “Fi” aspect and the other emphasizing on the “Game” aspect.

DeFi Evolution

In the late spring of 2021, GameFi and its new play-to-earn system emerged with a similar DeFi narrative, but a more complicated ROI mindset. The most notable example is Axie Infinity with its legendary dual-token-plus-NFT system: a governance token (AXS), a utility token (SLP), and an NFT with decreasing fertility capability across generations (Axie). A tokenomics design consisting of an investment token, a consumption token, and an interest-generating asset affords the protocol team the ease to manage its community consensus by stabilizing its market price. It is such an elegant tokenomics design that it has been referenced in numerous GameFi protocols, including the now popular x-to-earn models, such as Stepn.

The strategic advantage of a GameFi protocol is its conceptual ease for users to play. It was far easier for users to participate than those protocols based on the boring financial stuff, wasn’t it? It was so easy to play that play-to-earn games (allegedly) started to become a significant source of income for people who have never owned a bank account before, including players from the Philippines, Venezuela, Brazil, and Vietnam.

Haters gonna hate. There are criticisms of the current GameFi protocols being devoid of gaming content. But really, it is a matter of scope defining the game. Quoting Zimmerman’s definition of a game system, it is a system in which players engage in an artificial conflict, defined by rules, that results in a quantifiable outcome. (Rules of Play: Game Design Fundamentals)

GameFi is a game with the following characteristics:

• Conflict Across Time: players are drawn into an artificial conflict between past and future token prices, which are decided by other players at present.
• Fairness & Transparency: rules are programmed into blockchains with results being immutable.
• Simple Mechanism to Achieve Quantifiable Outcome: optimization of one’s strategies to achieve a higher ROI is the ultimate goal and gaming content. The little gambling and probability game makes it even more fun.
• Real Stakes Game: in some sense, the gaming content is a cover for the gambling nature underneath, i.e., take risks and make an informed decision.

Ultimately, the problem is to maximize user intake and manage community consensus. If separating GameFi into the “game” and the “fi” aspects, the problem is two-fold:

• Game: to adopt better gaming content so as to intake more players to participate, to stay, and to hodl.
• Fi: to design better tokenomics so as to align and incentivize various agents along with the protocol’s objectives to add liquidity, compete against others, and gamble in the real-stakes game.

With new DeFi liquidity paradigms entering and being tested by the market, there are some possible lateral adoptions from DeFi to the GameFi sphere. For example, integrating the OHM-styled bond sale into the issuance of the seasonal pass. On the underlying financial layer, players sell their liquidity in exchange for protocol bonds at a cheaper token price. On the game layer, players buy season passes for access to gaming content and regular NFT and FT drops. The advantage of such a setup is to onboard players onto GameFi without the financial understanding of the how-to.

But they are just piecemeal changes to the gaming mechanism. It could be a new balance between game content and its financial incentives. Most importantly, we need a disruptive impact that comes from a rethinking of player-game interactions.

3A Game On-Chain

Blockchain is a disruptive technology in the sense that it enables a drastically different mode of product-user interaction, a paradigm shift coming with an unstoppable force. One might observe gatekeepers of the tradition along with rigid regulatory regimes accumulated over centuries have being trying to prevent DeFi and NFTs from disrupting the traditional finance and art industry in a more explosive way. But game industry, the new, emerging millennial industry, lacks such barriers. Disruption is coming fast. And traditional game developers are responding to changes robustly.

Taking reference on Zimmerman’s definition of game, the modern paradigm of game experience is a sequence of an encounter with artificial conflicts, planning to tackle a quantifiable problem, and the pleasure of ultimately overcoming it. For 3A games, the difference between off-chain and on-chain game experience is reduced to minimum except for the addition of a marketplace. Then, the difference ultimately lies in who shall benefit directly from players’ satisfaction: the game developers or the price stability in the marketplace.

In the long run, the game developer’s ability to maintain its token (both NFTs and FTs) price represents its commitment to the game project. For most GameFi projects, a steadily increasing price floor means either (1) the game launch has been better than expected, (2) initial investors haven’t pulled out their liquidity, (3) the team is gunning for a long-term outcome and a governance token dump isn’t imminent. But past price behavior constitutes no prediction for the future, which crypto participants have learned in the hard way.

On the other hand, games pushed on-chain have less such of a concern because (1) its tokenomics is designed to prevent simple gold-farming schemes, (2) small and gradual price inflation is conducive to a better game experience and thus more effective intake campaign, and (3) it does not aim for the quick cash to grab, but the long game to win - that is, a war of attention with the in-game experience as the ammunition to establish an all-encompassing ecosystem:

• In-take: launchpad, side-chain, marketplace, game guild, and incubators initiated to grab the audience’s attention.
• Filters: games of all assortment to churn game players into web3 dwellers.
• End-game: an all-encompassing MetaVerse that can simulate and satisfy players’ inner needs and desires.

There are definitely challenges faced by the traditional games pushed on-chain. The underlying assumption of the effectiveness of converting traditional game players on-chain is yet to be tested.

Conclusion

When blockchain technology enables a drastically different mode of product-user interaction, a paradigm shift is coming with an unstoppable force. As DeFi and NFT led the new paradigm of online community and consensus, GameFi is going to realize and popularize the idealization of web3 applications, i.e., for the people, by the people, of the people.

Empowered with complete asset ownership, data transparency, system decentralization, and transaction immutability (PoW), web3 users are able to participate, compete, and bargain with each other in a fair and free manner. However, on the flip side of freedom, democracy, and capitalism, there lies leveraged positions gunning for privileges. Tokenization of equal political and financial rights entails higher token ownership equates to higher influence on the marketplace, DAO governance, and community consensus.

Tokenomics design is an overwhelming topic in the sense that it has inter-connecting aspects and inter-dependent dimensions. Each is worthy of in-depth analysis:

• In terms of economic design, it includes market design, monetary policy design, and in-game mechanism design.
• In terms of tokenomics issues, relevant topics include in-game inflation, multiple-token system, fiat currency pegging, and new innovative mechanisms that allegedly can solve GameFi’s sustainability issue.
• In terms of project lifespan and operation, it deals with topics such as fair launch vs. institution vs. DAO funding-raising, bootstrapping initial liquidity, network effects, vampire-attack from competitor products, and community consensus management.
• In a more traditional economic sense, it is a matter of supply and demand, emission and consumption, production and value-capturing.

They are the essential considerations of decentralized applications, including stablecoin, DeFi, DAO, GameFi, and MetaVerse. This article is an immature attempt in this direction, attempting to pave the foundation for a more quantitative approach in future tokenomics research. Most importantly, to gather opinions, comments, and criticism from the crypto community. Each web3 dweller has his own unique perspective regarding decentralization.

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