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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.