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As a central concept to crypto gaming, tokenomics is a fast emerging field in game design. But it is also complex and oftentimes confusing. This article was written as a complete introduction and reference guide for developers, publishers and investors. We will cover crypto technologies, their applications and the underlying motivations at play.

Tokenomics is the portmanteau of ‘token’ – specifically a crypto token or coin – and ‘economics’. The term defines the interaction between various blockchain and decentralised technologies.

When theoretically perfect, a game’s tokenomics align the motivations of various parties; from creating a profit for a developer, in a simple model, all the way to being the defining aspect of fully decentralised and autonomous projects with millions of participants and billions of dollars in market capitalisation.

In crypto games we are aligning the motivations of these developers, players and investors – all of whom may take distinct profits from the running of a single game . However, it is increasingly clear that these roles are complex and blurred: Players become investors, investors may also develop aspects of the game and so on. So we can consider each participant as having a quotient of each motivation, similar to Bartle types.

Getting the tokenomics right is the fundamental base on which a successful crypto game is built, especially as the tokenomics can be difficult, if not impossible, to fix once the tokens and smart contracts have been deployed, and are out in the wild.

Well designed tokenomics means a fun game, increasing value and lifting profits. Meanwhile, the wrong tokenomics can mean

rapid devaluation, unenjoyable gameplay, player churn and even outright collapse of the underlying financials of the game.

Although tokenomics may seem new, the underlying concepts are not. There are many existing examples in games, gambling, business and finance already. For example, P2E (Play-to-Earn) has existed in the gold farming and power levelling of MMORPGs, most notably World of Warcraft, for many decades. While speculation in the likes of Magic the Gathering Online and Second Life are well documented. We can even look to EVE Online to see how big complex game economies can spill over into the real world and interact with traditional finance. Meanwhile, the governance tokens act like company shares and token exchanges can mirror traditional stock exchanges.

However, what is new to games are crypto’s core concepts of decentralisation and autonomy. That is to say, designing and building economies and products that self maintain and grow via aligned motivations of the participants. While DAOs (Decentralised Autonomous Organisations) are outside the scope of this article, some of the concepts pertaining to them will be discussed.

Equally, we will not cover the technical and legal aspects of tokenomics which are also large and sprawling topics which we at Department of Play are not experts on. There is a general assumption within this article that tokens in discussion are on the Ethereum blockchain or some derivative of it with a similar feature set, and that the mechanics applied meet the regulation requirements of your own jurisdiction.

The focus of this article is instead to introduce participant motivations and the mechanics of tokenomics, before connecting these together and describing the systems they create. Combined these concepts will give an understanding of how to consider and build the tokenomics of your game.

Note: Many of the core principles discussed though this piece relate to established game economy concepts. With that in mind it may be helpful to read our blog The Principles of Building a Game Economy

Having an understanding of the tools available to you is essential to understanding and building tokenomics. Specifically, what mechanics are used to create, route and alter tokens, and subsequently, what the usage and the drawbacks of these mechanics are. As such, this section will provide an overview of the core token mechanics as well as the systems and the contexts in which they matter.

A coin is a value store that is native to a blockchain. For example, ETH is the coin that is native to Ethereum blockchains and BTC is native to Bitcoin blockchains. Often these coins are rewards for the consensus method, such as mining in proof of work or staking in proof of stake.

A token, however, behaves much like a coin in how it can be transacted between addresses. But unlike a coin, a token is user-defined, so created via some programmatic method from a specific address.

Within Ethereum a specific standard called ERC-20 is a common general use token template. The standard allows the tokens to behave and act in a predefined manner. This standard means ERC-20 tokens can be interacted with in a predictable way such as exchanging, without knowledge of the specific token.

There are many types of tokens, including:

When talking about tokens in the abstract within this article, we are referencing all kinds of tokens regardless of utility or fungibility.

Fungibility is a very fundamental concept in tokenomics and enables a great deal of behaviour, simply by defining how a token can be exchanged with other tokens.

If something can be exchanged like-for-like (e.g. a dollar bill) without a loss of function or value then it is considered fungible. However, if an item is one-of-kind (e.g. the Mona Lisa) then it is considered non-fungible, as it cannot be swapped for another without loss of value or function.

Therefore fungible tokens are great for in-game currencies, such as gems or coins, as they can be granted, swapped and spent freely. However, a non-fungible token (NFT) holds unique metadata that makes it distinguishable amongst other tokens. This metadata and non-fungibility makes NFTs great for in-game items such as characters, armour or weapons.

Fungible tokens are often easily sold in the secondary market via automated exchanges that dynamically value each token (or token-coin) pair, as they are abundant and non-unique. Whereas non-fungibles often have more varied values based on their unique attributes and limited supply. This means NFTs are often sold and bought in the secondary market via an auction or seller-set pricing.

However many people take a photo of the Mona Lisa, the original painting remains non-fungible.

Smart contracts are bits of code that are created on the blockchain, and can automate interactions between coins, various tokens and outside inputs.

A smart contract might, for example, allow a player to pay in currency tokens and specify an NFT, then execute the contract to upgrade their NFT’s stats. Those would be useful for allowing players to spend XP tokens to upgrade their in-game equipment.

Smart contracts can also pull data from external sources. In Ethereum this is achieved with what are known as ‘oracles’. An oracle could be used to provide real world weather data to a smart contract, which could then be used to dictate the success or failure of crops (e.g. carrot tokens) in a farming game.

Minting is the process of creating a token (fungible or not) on the blockchain by a contract with a specific address. Tokens are subject to a specific set of requirements at minting, such as:

By capping the total supply it sets an immovable limit to the amount of tokens that can ever be in circulation. The benefit being that the clear finite nature of the token reduces supply, creating scarcity and therefore increased price.

Issuance defines the mechanics by which new tokens are bought, traded or otherwise distributed. There are several common ways to issue tokens:

Note, this is not an exhaustive list of all issuance mechanics and some of these methods may cross over between each other. For example, a preselling may have a reserve of tokens for an airdrop to randomly reward those buying in.

Additionally, issued tokens may have vesting periods which lock them from trade, preventing holders from rapidly acquiring and then dumping them.

Burning is the inverse of minting: It is the destruction (or otherwise permanently taking out of circulation) a token or amount of tokens.

There are two ways of burning tokens: Firstly, by reducing the total supply programmatically (i.e. via the use of smart contract) or, secondly, by sending the token(s) to an address with no known private key (i.e. an inaccessible wallet). The programmatic approach is great if the token was set up to be interactable in such a way, while the latter is a hack which may go against the original token creator’s wishes.

Burning might occur as part of an exchange. For example, using breeding tokens to breed two NFTs to mint (create) a new NFT. Here the tokens are burned, but new tokens may be created at a later date.

The benefit of burning is that it reduces overall supply, increasing scarcity, which can increase price and so benefit the remaining holders. As such, token holders often like token burns when there is a set supply cap, making the token deflationary.

Inflation occurs when the total circulation (or cap) of a token is increased due to continued minting and issuance. However, even though the circulation is increased, these tokens may not end up being liquid; e.g. available on an exchange. Instead, new tokens may be held or staked (see Staking) by the recipients.

The advantage of inflationary tokens is that they make a token more accessible (cheaper and / or more liquid) to participants, often generating revenue for developers via direct selling. However, if either the demand for the token is not also increased, e.g. through an influx of new participants, then the increased supply reduces demand and so decreases the token’s market value.

A floating supply occurs when there is a burning process, but unlimited (or very high) issuance or cap. Meaning that at any point the token may be inflationary or deflationary dependent on the current market parameters.

This is good for the creation of self-balancing systems, where a price is attempting to be stable despite incoming or outgoing participants.

Staking is a process of locking up a token for a set time in exchange for a reward. This reward is often, but not always, more of the same token.

Staking is used in Proof of Stake consensus methods, in order to ensure the blockchain is validated by those with an economic interest in the chain. Whereas in games it is often used as a way of distributing token revenue, often via the use of a treasury (see treasury).

Staking increases the value of a token in two ways. Firstly, the staking reward means the token generates a passive income, so the floor value of the token is some multiple of future reward value. Secondarily, the side benefit of locking the token up so it cannot be traded, reducing tradable supply and so increasing token price.

A treasury is an address pooling and distributing coins and tokens. These coins and tokens may be the proceeds of the sale of other tokens or those sunk through some specific in-game action, such as breeding.

Treasuries can have multiple methods or rules to automatically distribute it’s holdings:

Tokens that allow voting – albeit without a physical ballot box – often serve the spirit of decentralisation by letting all holders contribute to governance

Many tokens allow their use in voting, often on matters relating to the governance of a game, its treasury or its community. This is why tokens with voting rights are often called governance or security tokens, where the latter reference the similarity to company shares.

Token holders use their tokens to vote on a matter through some (often web-based) system, where there is a correlation between tokens held and votes possible – e.g. 10 tokens equals 10 votes.

Voting enables steering in the best interests of those holding tokens on matters that directly affect them. This can allow for a greater sense of ownership and emotional buy-in from investors.

However, voting is an essential element of autonomous development, where, notionally, developers can step away from the software as the community manages and decides the product’s future.

Pegging is the process of tying the value of one token to another (or some other asset such as fiat).

When a token is pegged it means that it can always be exchanged for a specific value. For example, casino chips are pegged to a fiat value (e.g. GBP) as they can always be bought from or sold to the house for their face value. To achieve this the casino holds a reserve of cash equal to the amount of chips in circulation. Therefore a £10 casino chip is always worth £10.

Similarly, Tether is a token (USDT) on the Ethereum blockchain which can be bought and sold from it’s issuer (Bitfinex) for $1 per token, where Bitfinex ostensibly holds a cash reserve equivalent to the total USDT supply. That is to say that Tether is pegged to USD and has a stable trading price, resulting in many calling it a ‘stablecoin’.

Alternatively, stability can be achieved through algorithmic adjustment such as Dai’s Target Rate Feedback Mechanism (TRFM) which is able to maintain stability around $1 USD without the use of a reserve. DAI is still considered pegged to $1.

The advantage of pegging is it removes the volatility of assets over time, giving more predictability to trading and prices. This is useful in various situations where certainty is needed over speculation but token trading should still be possible.

Wrapping and bridging are ways of moving tokens from one blockchain to another. A bridge is a piece of software consisting of a frontend and some smart contracts, which allows for tokens to be locked up on one blockchain and a new ‘wrapped’ version of the token on another.

This allows non-native tokens or coins to exist on a blockchain, such as Bitcoins on Ethereum. In games we see Ethereum coins (ETH) on Axie Infinity’s blockchain (Ronin Network) as ‘wrapped Ethereum’ or ‘wETH’. The Ronin Bridge acts as a conduit for assets on the Ronin Network and their equivalent on Ethereum Mainnet.

Crypto gaming hit Axie Infinity’s allows other games to place Ethereum coins on its blockchain

Exchanges allow the exchange of one token or coin for another token or coin. These come in two varieties: Centralised and decentralised.

Centralised exchanges (e.g. Coinbase) holds a user’s tokens and coins directly and allows for internal trading. While decentralised exchanges (e.g. Uniswap), often shortened to DEX, exist on the open blockchain and act to automate token and coin exchange via the liquidity provided from other participants. The value of these transactions are defined algorithmically based on the supply and demand of the traded pair.

On the Ronin Network participants can trade between various token pairs used in Axie Infinity using the Katana DEX while others can provide tokens as liquidity, earning revenue from the exchange’s fees.

Unlike traditional game economies we need to think about the motivations of several participants; not just players. There are three top level motivations (or roles): Development (developer role), play (player role) and investment (investor role). While these roles exist for all games, tokenomics brings motivations closer together, in a more open and democratic way via the blockchain. In addition, some tokenomic mechanics enable motivations to be met in entirely new ways.

Ultimately we are attempting to align participant motivations through the mechanics and balance of tokens. So, our first question should be who are these participants and what do they want? In this section we will answer that question for each motivation / role.

Developers are motivated by building, appending or improving the current experience of the game. This might be from developing new features, fixing bugs or improving quality of life. But also expands to the creation of tools, such as asset tracking websites or market makers.

There are two types of developers:

External developers have the most complex motivations in this group and how close their relationship is to the game is dependent on how decentralised and open development is. Some external developers may build external tools that help players purely out of passion and community recognition, meanwhile others do so for financial gain.

That financial gain may come directly from making requests to the DAO for some new feature or improvement, or it may be from some service they provide. In the former, developers can submit development proposals which are voted upon and funded by the treasury upon completion. In the latter the developers may see some opportunity to develop a tool or service entirely separate from the game, such as a token swap or a trading platform.

In some cases these external developers are other businesses or DAOs with their own salaried employees, as is the case with tokens on commercial exchanges, such as Binance.

Traditionally we’ve thought of players coming to our games for leisure: Entertainment and socialising. But with the advent of graphical MMORPGs with open economies in the late 1990s, a new class of working player emerged. Crypto gaming unlocks both of these player types, which we identify as:

Most traditional games have spent millions of dollars attempting to keep P2E players out of their games, so why then do crypto products embrace them? Well, P2E has emerged as a reality of decentralised and truly owned assets: Once these items are on chain the developer ostensibly loses control over them and they gain real world value.

But these P2E players often act as great virality tools: Their income is linked to future success of the product. P2E players can only exist if P4F players do also, so their motivation is aligned with all other participants, so they become a mobilised and motivated fanbase. They can also attract investors who profit share with them by means of item loaning.

However, within P2E there are currently two types:

A third type may emerge in the future: Actors. These players will behave in ways which are human, perhaps in crafting responsive stories like a dungeon master, playing an in-game character or running guided tours. To some extent they already exist in the form of moderators.

Investments are one of the most interesting, diverse and overlapping motivations amongst participants. These are, along with P4F players, the participants bringing money to the game. This money might end up in the hands of the developers or P2E players, but ultimately investors are mostly, but not always, expecting a significant increase in their outlay.

We have identified several investor types:

Participants do not have singular or static motivations. Indeed there are lots of overlapping motivations in a game which also change over time. As such we can think of each participant as having quotients of motivations.

For example, a participant may act as a backing investor, but also be a P4F player, much like traditional crowdfunding players. Meanwhile, a top level player may be earning a living in the game via P2E but wishes to participate in the future of the game via governance votes.

As games tokenomics evolve, we will likely see specific motivation quotients defined as niches. These niches will be made even more specific as integration into the wider world of DeFi (DEcentralised FInance) occurs. Already we see ‘guilds’, investors who invest in in-game assets via a treasury and use them to generate revenue share via players, who offer their own tokens for investors. So investors are investing in guilds to invest in assets for players who will earn via play.

Our goal then, is to design tokenomics that aligns the various and complex motivations of our participants via the mechanics of tokens and the blockchain. These mechanics working alongside each other are known as systems.

While tokenomics is still in its relative infancy, there are already lots of emergent systems which are offering templates for aligning motivations through token mechanics. Below are a few examples of these.

Looking into the distant history of game design can prove highly relevant to understanding the role value exchanges have to play – something highly relevant to NFT monetisation.

Any game can be considered, at the most fundamental level, as an exchange of value. Chess, for example, is the process of trading turns and pieces for an opponent’s pieces with the ultimate goal of forcing a check.

As such it is easy for games to put some or all of this value on-chain via tokens. For example it is common to see:

In-game items are interesting to both players and investors of various types. For P4F players, it is a way in which they will spend to gain a play advantage. Any in-game item will be attractive to players via one or more of the Four Cs of Monetisation:

P2E players, however, will be looking to gain tokens that have real world value and can, by some mechanism, be exchanged for fiat. This might be a currency or some in-game item (NFT).

Meanwhile, investors will want to buy in-game tokens that will either appreciate in value due to their being a limited supply or will allow others, via play, to generate more tokens of value.

However, with games exchanging values rapidly and blockchains often being limited in capacity and speed, not to mention gas fees, it’s often not practical to put all game items on-chain. As such, many games keep lots of in-game items off-chain, allowing for some to be redeemed on chain in bulk at a later date.

Web3, which encompasses cryptocurrency and blockchain, is founded on an ideal known as decentralisation: The movement away from single organisations or groups governing and regulating from a central location (metaphorical or physical) while maintaining power (and assets such as data), as seen in the current web and across established financial ecosystems. Decentralisation instead presents more open and democratic systems where power is not held in one place. In decentralisation a distributed ledger (i.e. a blockchain) provides the transparency which is key to openness, while tokens can offer democratisation.

These ideals and technologies ostensibly allow games to become managed outside of the original developers. However, in order to achieve this what is known as a governance token is commonly issued. Governance tokens provide two things:

As such, governance tokens often take the form close to what we would traditionally consider shares: The ability to vote on issues while providing those holding the tokens with a share of profit. Often profit share is proportional to the amount of tokens held.

What is known as a treasury is often at the heart of such systems: An address holding proceeds as tokens and coins. Governance tokens can then be ‘staked’ (i.e. locked up and unusable for some time) in exchange for a payout from the treasury.

Often governance votes will allow holders to decide on how the treasury gets spent. In some specific cases this allows external developers to put together a proposal featuring suggestions for improvements as well as a cost. Once the proposal is accepted by a governance vote and the improvements implemented, the developer will be rewarded from the treasury.

Initial Coin Offerings (ICOs) and presales offer a straightforward way to raise funds to enable the development of a project or product by selling some form of token.

Note: We will use ICO as a catch all term for the initial public offering of any type of token. ITO (Initial Token Offering) is often more technically correct, but today the terms are used somewhat interchangeably.

ICOs gained popularity around 2017 as altcoins began to appear. ICOs offer a way of funding future development of a chain or platform, and are increasingly being used by game developers as an alternative to equity fund raising.

The offerings typically see a developer or publisher sell a new token at a low or discounted price. Investors in that token are motivated by the potential profit to be made from increases in value tied to a relevant game or developer’s success.

There are typically two types of tokens offered via an ICO:

It is also possible for tokens to mix elements of security, governance and utility.

While an ICO and a presale bear a number of similarities, it is important to understand them as distinct entities. A presale is much more comparable to a crowdfunding effort via the likes of Kickstarter or Indiegogo: It is aimed at a large number of players and speculators rather than a small number of professional investors.

Presales are a way of selling early tokens to a community, often at a discount, to generate funds, engage an early evangelist audience and test for interest with regard to the project’s viability.

Presales do present two significant challenges: As with a crowdfunding campaign, it can be hard to communicate the value of an incomplete product; or even a product only at the planning stage. While successful presales can attract meaningful attention, a great many can fade away with little to no impact. As such, marketing and community building are essential as a means to support a presale effort.

Additionally presales release tokens into the wider market which can result in speculation and rising prices. This is known to produce a buzz around the project and draw increased attention. Again, a comparison with crowdfunding is relevant here, with the likes of a Kickstarter campaign may generate hype and interest as well as funding.

Traditional financial ecosystems are highly centralised, with limited banks, regulator and state agencies holding power, control and governance. And often they gather at global financial hubs such as London, presenting physical geographical centralisation.

One property of tokens is that they are not limited to existing solely within your game and the context surrounding it. Put another way, they can exist elsewhere in the broader crypto ecosystem.

If on a side chain, for example, tokens can be bridged to a mainnet such as Ethereum (a mainnet is a fully functional, operational blockchain, as opposed to the likes of testnets and regtest networks).

There are two key advantages in bridging your game’s tokens to a mainnet:

Opening up your tokens to wider use means relinquishing control over how your tokens can and will be used. It could even be the case that players fall victims to scams that are far beyond your control. Furthermore, mistakes in the likes of minting and smart-contracts are non-reversible, meaning particular caution and a careful process is essential.

The process and theory of designing a crypto game ultimately shares a number of similarities with the creation of free to play games. Similarly, if you are newer to the space you can read our blogs on building game economies, retention frameworks, game balancing, LTV and monetisation catalysts.

Detailing the process of designing an entire tokenomics from beginning to end is unique to your game and funding status, so is beyond the scope of this article. However, you can begin to shape a game concept to be a successful crypto game by asking yourself or your team a number of questions:

Crypto technologies are as complicated and diverse as the human motivations driving them. Gaining a complete grasp of everything from mining and investment conventions to economic theory, game design and the ideals of web3 is time consuming and difficult, but in essence there are only three areas to consider:

As with any game design we’re aligning human wants with technology to create an experience. Be it for a developer, a player or an investor. What is new in crypto games is how transparent and closely linked these participants are. It is creating a good experience for each that will pull everyone together to make a product a success.

If you have any questions, or would like our team to look at your crypto game project or product, get in touch.