‘Oh we are so back’ - reflects the bullish sentiment of Crypto Twitter (CT) due to the recent game token frenzy initiated by Big Time and ZTX. But is this a true comeback, or are we simply revisiting the same pitfalls of the P2E era?

History has taught us that tokens can effectively incentivize certain behaviors, yet game studios must remember the double-edged sword of financial incentive design. When financialization becomes a primary reason for user engagement, user retention diminishes when the incentives wane. But more on this issue later.

This week, the Wolves were asked to share their thoughts on gaming tokens, both their short and long-term advantages and disadvantages.

The Benefits of a Gaming Token Launch

Additive UA Incentives

The expenses related to user acquisition (UA) have been steadily on the rise in recent years, posing a growing challenge for game studios in achieving a favorable lifetime value (LTV) over the cost per install (CPI). Conventional UA methods require direct cash expenditure and nowadays strain profitability, but the introduction of gaming tokens presents an opportunity.

Game studios have the option to utilize tokens as incentives to engage users more deeply in their games. However, unlike Big Time and ZTX, the emphasis should primarily be on existing communities, especially those players who demonstrated interest before the shift toward financialization took center stage. Moreover, providing rewards reaching thousands of dollars doesn't make sense from a Customer Acquisition Cost (CAC) perspective.

Token incentives can have a far more significant effect when they target the right users who have a strong connection to the game, offer smaller rewards (around $1), and coincide with a game development milestone like a global launch.

Business of Apps - Mobile gaming advertising spending worldwide from 2020 to 2025

Hype and Exposure

Tokens are renowned for their ability to incentivize specific behaviors, and a notable side effect of this approach is the substantial increase in brand awareness. Analyzing Big Time's engagement data on Twitter sheds light on the impact their token launch had in the lead-up to their token exchange listing on October 11th.

Big Time Engagement Over Time on X. Data by Helika.

Regarding token listings, Big Time successfully secured listings on major centralized exchanges (CEXs), including OKX, Coinbase, and Gate.io. This significantly expanded their exposure to the broader retail buyer market, resulting in a substantial influx of liquidity, with trading volumes peaking at up to $250 million over 24 hours.

The heightened attention translated into a surge of players flocking to Big Time's servers, as evident from numerous reports of server congestion and lag due to the increased player count. Additionally, the game distributed token rewards to holders of specific NFT collections, leading to rapid spikes in NFT prices.

In summary, Big Time's experience illustrates that a token launch can thrust a project into the forefront of the Web3 attention economy. However, sustaining this level of attention over extended periods presents a distinct challenge.

Fundraising

Introducing a gaming token as an alternative to securing funding offers an avenue to raise capital without relinquishing equity to investors. The level of control over a company is inherently tied to equity ownership. This dynamic is particularly pertinent because the founders' artistic vision may conflict with the business objectives of venture capitalists (VCs), underscoring its significance.

Premium Currencies

Crypto gaming tokens bear a strong resemblance to premium in-game currencies like gold, gems, or rubies, a monetization model widely seen in games, especially F2P titles. Given the prevalence of this concept among gamers, integrating gaming tokens becomes a straightforward process.

"It is possible to play without tokens, it is possible to earn some tokens when playing, and tokens deliver enhanced gaming experience, faster progression, visual perks, boosts, you name it."

When executed effectively, this approach leverages the existing player understanding and can establish a continuous demand for tokens from a broader, mainstream audience, simplifying their adoption and usage.

Enabling Different Personas

Tokens, along with NFTs, empower peer-to-peer trading, fostering the emergence of secondary markets. These additional layers attract a fresh set of player personas – the merchant, investor, or arbitrager – individuals keen on engaging in 'economy games’. This player type mirrors those found in MMORPGs like Runescape, perpetually seeking to accumulate in-game wealth.

OSRS Items.

The open economy of Web3 games presents a challenge in managing these player groups, as they often extract financial value from the game. Therefore, game developers should consider implementing distinct features catering to players and investors, which operate independently from the core game loop. NOR is an example of a studio adopting this strategy.

Web3 has demonstrated a product-market fit for accommodating these audiences, offering studios opportunities for enhanced monetization and growth.

Alignment and Player-Owned Economies

The introduction of a gaming token can trigger potent network effects, as illustrated by Big Time. These assets serve not only as a user acquisition tool but can also play a vital role throughout the gaming cycle by aligning the distribution of value among the studio, player, and creator.

This alignment offers a compelling means to incentivize contributions to the game's ecosystem, establishing an immutable framework for equitably rewarding user-generated content (UGC). By motivating creators to promote their contributions both within and beyond the game, this approach fuels growth, benefiting the studio.

Furthermore, gaming tokens can give rise to intriguing and potentially innovative player cohorts, fostering multiple player-owned micro-economies. The ownership element within these dynamics can function as a robust retention mechanism.

The Downsides of a Gaming Token Launch

The Nature of Seeking Capital

In a game where players have the chance to earn financial assets, they will naturally seek out and eventually discover the most efficient path to maximize their value. The route that offers the most value will inherently become more appealing to the majority of players.

To illustrate this point with an example, the founder of NOR was paraphrased as follows:

"If I kick the ball left I get $1, if I kick the ball right I get $4, so I am going to kick the ball to the right."

When financialization is integrated into the core game loop, it can diminish players' motivation to prioritize financial gain over entertainment value. This underscores the significance of maintaining a clear distinction between the two aspects.

"On the other hand, competitive user-to-user markets can also be associated with negative experiences: playing to earn rather than to enjoy, having rewards for your favorite activity cut due to competition, and playing with numbers rather than with people." ~Virtual Economies Design and Analysis.

Difficult to Manage

The long-term success of a gaming token within an open economy model remains largely unproven, with only a very few successful examples, such as Fantasy Westward Journey.

14 attributes for designing good money for a virtual economy:

1. Valuable
2. Fungible
3. Divisble
4. Verifiably Countable
5. Recognizable
6. Durable
7. Constant value
8. Easy to transport and handle
9. Low demurrage
10. Resistant against theft
11. Resistant against counterfeit
12. Private
13. Flauntable
14. Accountable.

In highly open economies, gaming studios have less control over the outflows of their tokens, presenting sustainability as one of the most significant design challenges in Web3 (highlighted in point 7: Constant Value). Even in semi-open economies, like those found in many MMORPGs with grey markets, the ideal model has proven elusive.

PlayerAuctions.com - The Average $ price per 200M GP in OSRS (2022-2023).

Online game economies have been around for over two decades. Yet, there haven't been sufficient attempts, failures, and iterations for game developers to establish a reliable framework for designing open-market, token-centric ecosystems. This makes launching a gaming token a somewhat uncertain endeavor, as Web3 gaming studios must innovate and experiment with new strategies, the outcomes of which are unproven.

Underscoring the importance of meticulous token design and the need for systems that empower studios to effectively monitor, control, and adapt their in-game economies as they accumulate more data.

Dead Economies = Dead Games

Gaming tokens will consistently encourage behaviors that extract value, ultimately benefiting farmers, investors, and similar participants. However, this approach may also introduce potential disadvantages for existing player communities. The significant fluctuations in a token's value can create inefficiencies and difficulties in trading, ultimately diminishing the overall gaming experience. Particularly relevant to players who engage with the game primarily for entertainment purposes.

"The core issue when designing an economy is not inflation or deflation per se, but rather the failure of its currencies to keep within certain bounds of value. Wildly rising, falling, or fluctuating currencies prevent almost any player economic activity from proceeding smoothly." ~ The Machinations Manifesto For Building Sustainable Game Economies — The Design Pillars

Over time, the price volatility of a gaming token can have repercussions, influencing not only the engagement of financially motivated players but also negatively affecting the retention of casual gamers who prioritize the enjoyment of the game over its financial aspects.

Shamus Young - Who Broke the In-Game Economy?

Regulatory Risk

The regulatory landscape within the crypto sphere is continuously evolving, leading to uncertainties regarding the future classification of gaming tokens, particularly whether they will be deemed securities. Should gaming tokens eventually fall under the category of securities, game studios would be obligated to adhere to an entirely new set of regulations and legislative requirements, which could potentially burden their games.

NFTnow - The SEC, Gaming Tokens, and Web3: What Now?

At present, the regulatory environment is not uniform and varies by region. For example, the United States, through its SEC, has been actively advocating for more comprehensive crypto legislation. In contrast, other regions like Asia have displayed a greater degree of flexibility and leniency in their approach to gaming tokens. This divergence in regulatory stances further complicates and adds uncertainty to the utilization of gaming tokens in the industry.

Moving Past the P2E Era

The transformation of Web3 from 2021 to the present is strikingly evident. In 2021, the launch of gaming tokens often occurred prematurely, sometimes preceding the availability of a playable product. Furthermore, these tokens found their way into games that lacked the necessary level of entertainment value. Notable examples like Crabada and DeFi Kingdoms essentially functioned as glorified DeFi protocols, offering minimal gameplay depth. Unsurprisingly, players refrained from reinvesting their earnings in these games due to their limited entertainment appeal.

Conversely, the past year has witnessed a significant shift within the industry. Game developers are now placing greater emphasis on crafting higher-quality and more engaging products. It's increasingly apparent that the enduring value of a gaming token is intricately tied to the overall enjoyment and quality of the game. To secure long-term success, games must strive to capture a wider audience and transition away from predominantly catering to value-extraction-focused players in the Web3 realm.

How long will the token hype last?

Retail investors within the crypto sphere often operate based on pattern recognition. And as long as gaming token launches maintain their track record of success, the accompanying hype is likely to endure. However, should the inaugural gaming token encounter a substantial failure owing to a dearth of demand, it could instill caution among investors. This prudence may lead to diminishing attention for subsequent token launches, although there will inevitably be outliers.

The precise duration of this hype cycle remains uncertain, but some Wolves suggest it might not extend beyond 4-6 months.

Conclusion

In crypto Twitter’s greed for gaming tokens, it's vital to recognize both their immense potential and the lurking pitfalls. While gaming tokens additive UA incentives, generate hype, facilitate fundraising, and introduce new monetization models, they also bring challenges. These include the risk of prioritizing financial gain over gameplay quality, complexities in managing open economies, and regulatory uncertainties.

The gaming industry's shift towards creating more engaging products and considering long-term player satisfaction signifies a maturing phase. But how long the token frenzy lasts remains uncertain, with a delicate balance between success and caution among investors likely shaping its duration, possibly within 4-6 months.