Creating Sustainable Economy

As mentioned in the previous chapter, the biggest challenge so far for tokenized web3 games has been to create a sustainable game economy. The in-game economy design should mitigate the effects of investor speculation and market cycles, without relying on an inflow of new players. Unfortunately, as we saw during the last cycle, this is not often the case.

In the economy of web3 games, a common problem is that the prices of tokens and NFTs begin to decline when the increase in daily active users (DAU) slows down, and web3 native players leave when the return on investment (ROI) decreases. This creates a destructive chain reaction that is caused by tokens with no supply cap, inadequate inflow mechanisms, a market saturated with new NFTs, and web3 native players who only play to earn.

Our team has addresses the above-mentioned issues and designes the game economy in a way that we can mitigate the effect of the crypto market cycles on the game economy.

Our past experience developing and publishing Tycoon games has given us valuable insight into the do's and don'ts of in-game economies. While some argue that the free-to-play game economy cannot be applied to web3 games at all because the in-game currency has no real value, and therefore you do not need to worry about a recession, this is not true. However, the token does add to the complexity and especially to the risks related in poor economy design.

If the free-to-play game economy is unsustainable, it can be almost impossible to make the game profitable. Here's why: while some developers (especially hyper casual) rely on in-game ads, many successful game companies, like Supercell, operates an ad-free revenue model where revenue comes from in-app purchases. The primary source of new players is paid user acquisition (UA), which has an average Cost Per Install (CPI) ranging from tens of cents to tens of dollars, depending on targeting and optimization. To become profitable, the game must generate a minimum return on investment from in-app purchases, which can take a significant amount of time.

In an effort to simplify the design of IAP-monetized free-to-play games, we have created three simple laws that can serve as a foundation for profitable games:

  1. The game should have a high entertainment value, meaning it should be enjoyable and keep players engaged for extended periods of time (good retention!)

  2. The game should have well-designed in-app purchases that increase entertainment value without conflicting with the first law.

  3. The game should offer recurring purchases to add more entertainment value, without conflicting with the first or second law.

Initially, a majority of the web3 audience was attracted to the play-to-earn aspect of games. These players can be referred to as "earn-first players". The remaining players are assumed to enjoy the game more because of its entertainment value, and are thus referred to as "game-first players". In addition, there are investors who primarily engage in speculating on token value. Although the player base is not polarized, and rather exists on a spectrum, it is evident that some of the early web3 games were primarily designed for earn-first players. The entertainment factor comes from earning, rather than from the gameplay itself. Some of the teams did an excellent job with this, especially given how early it was in the crypto space.

However, as we move towards the next wave of web3 games, it is inevitable that the games-first approach takes over, with a focus on entertaining gameplay and sustainable economies, while still being lucrative for the players. Most play-and-earn games lack a free-to-play option. To get started, players need to purchase NFTs, which are sometimes very expensive. In free-to-play games, players decide whether they find the game entertaining enough to spend money (or watch ads) after playing for a while. In games designed for earn-first players, after the initial NFT purchase, players can spend tokens to further increase their profits.

New Metric for web3 games

In order to monetize free-to-play games, the second law is to design in-app purchases (IAPs) that increase the entertainment value of the game. Success can be measured by Paying User Conversion (PU%) and Average Revenue Per Paying User (ARPPU) in comparison to Cost Per Install (CPI), which determines the game's profitability. These metrics are honest and straightforward and can determine the game's future prospects.

Web3 games have a significant advantage over traditional free-to-play games because in-game purchases (IAPs) can increase both the entertainment value and earning potential. This means that there can be a wide spectrum of different types of IAPs, and the economy will remain sustainable as long as the IAP design is good enough to the make players spend, just like in free-to-play games when we sell virtual goods. Metrics like PU% or ARPU, which are commonly used to measure free-to-play games, cannot be directly applied here. Therefore, we have created a new metric called the Spend-to-Earn ratio (STE). However, let's leave this metric aside for now and return to it later.

โ€œโ€ฆWeb3 games have a huge advantage over free-to-play games because the IAPs can increase the entertainment value but also have earning potentialโ€ฆโ€

The third law is to make purchases recurring, and it could be the most challenging one. The fundamental requirement is to keep players engaged for the long term. Games designed for "earn-first" players can have astronomical long-term retention rates (day 30 or day 90) compared to free-to-play games. This is understandable if you think about the concept of "earn-first", which is essentially a job.

Balancing the economy with the Spend-To-Earn ratio

Retention should be considered one of the main KPIs for a "games-first" approach as well, although we might need to settle for lower numbers. What makes retention so important is that the conversion rate to a returning buyer is typically higher compared to the conversion rate of a paying user. Therefore, a successful game design generates high lifetime value (LTV) with recurring sinks to which players will periodically spend more money, making the game experience more fun.

We will create the foundation for a sustainable economy by introducing gameplay with high entertainment value that keeps players engaged with recurring sinks. Players can spend tokens to be more entertained and possibly increase their earnings. However, if the increase in earnings is excessive or the in-app purchases (IAPs) with lower effects on earnings are not entertaining enough, it may create a flux in the game treasury with devastating results, as we have seen happen before.

Therefore, the inflow (total tokens returning to the game economy pool) and outflow (total rewarded tokens) must be balanced. One proper metric to use is the Spend-to-Earn (STE) ratio. The STE ratio is the ratio between tokens a player has spent in-game and/or has gone back to the treasury and the tokens earned. The spent tokens does not only include IAPs but also possible trading fees, which can be substantial part of the token inflow. Spent tokens include any tokens spent, whether earned, gifted, or bought from an exchange. Earned tokens include any tokens received from the in-game treasury, such as those from seasonal tasks and event rewards.

STE is similar to return on investment (ROI), but in this context, ROI gives the potential return of the investment permitted by the game economy as a function of time, while STE is a player performance-specific metric that gives developers data on the actual average return.

Maintaining a high average STE (above 1.0) is crucial for sustaining the economy. Similarly to traditional free-to-play games, where higher PU% and ARPU are desirable, developers of web3 games should aim to increase the proportion of players with a higher average STE. It is likely that STE values will follow a Gaussian distribution, with values ranging from zero to infinity.

To optimize STE, you can adjust the size of rewards, fees, the effect of IAPs on earning, or design IAPs with entertainment value only. The latter is the most efficient way to achieve this goal. Ultimately, the success of a web3 game depends on the quality of its design and IAPs, as is the case in traditional free-to-play games

The simplified example below demonstrates how a playerโ€™s STE is determined:

A player enters Paradise Tycoon without previously purchasing NFTs or Moani tokens. The player starts farming crops and collecting resources, he's able to trade some of his resouces to another player for a few tokens. At this point, the player's STE is 0, but soon they wish to progress faster and upgrade their items. To maintain good progress, the player buys additional resources for the upgrade with tokens. After a while, the player has built a nice villa, but is eager to customize it with an in-app purchase or finds to buy some additional consumables to gain edge in a PvP tournament. Each of these steps gradually increases the STE.

Sustainable and engaging game economy

โ€œโ€ฆsome players can earn more than they spend even to a point where they can make a living out of it, others will happily spend more tokens than they have earnedโ€ฆโ€

In a sustainable economy, spending tokens should always increase the entertainment value. Some players may even earn more tokens than they spend, to the point of making a living out of it. However, most players see gaming as entertainment, not a job, and they will happily spend more tokens than they have earned. Ultimately, it is the entertainment value that enables gaming to become a job for some players.

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