How The Play To Earn Economy Works

& Why Axie Infinity is a Shitcoin…

Most play to earn games have pretty shitty business models. While it’s common to lean on Ponzi-games in crypto, the amount of play-to-earn games that I’m seeing coming through that have no monetisation strategy except for reliance on Ponzi-games is staggering.

Building games is hard. Really hard. It’s a hit-driven industry, with huge network effects. If we look historically at successful games, they’ve required insane amounts of development work and built significant traction through huge marketing campaigns. It’s no wonder the video game industry is becoming more oligopolistic, with M&As increasingly common, as the acquisition of Activision Blizzard & Bethesda by Microsoft for close to $80bn all in shows us. Indie outliers such as flappy birds (RIP) do exist, but they’re the exception, not the rule.

Fundamentally, the criteria of building a successful game in web3 are no different from the past, we can just now utilise crypto to move these levers in innovative ways.

For me, the three criteria for a successful game are:

1. The game needs to be fun. If the game isn’t fun, people won’t play it. Expecting a game to be insanely fun from the outset is probably, in most cases, unrealistic — it’s something that can be iterated towards. Rather looking for a team that has a track record of delivering addictive games is a better measure of success. Halo, gained huge traction, not for its graphics, storyline or voice-acting (although these were great) but because it was, at its core, a joy to play.
2. It needs to allow new players to enter easily. Any business model where there is a cost to entry is usually an immediate no from me. It’s just not sustainable. The barriers for entry for a play-to-earn game need to be so low that anyone can start playing in a matter of minutes, with next to zero financial resources, otherwise, the probability of the game getting virality is close to zero. A great example of minimal barriers to entry is Fortnite, the combination of ease of access, fun and virality caused it to become a once in a decade sensation.
3. It needs to generate sustainable revenue. Good games will have a diverse source of revenue. The opportunities for revenue-generating in web3 gaming far outweigh those of traditional games, yet few play-to-earn games capitalise on this (we’ll explore this later). A good example of sustainable revenue in the traditional gaming world is the FIFA series, where players pay a substantial amount for the game, are forced to buy the new edition (with minimal gameplay changes) to update player stats, and can also buy players with in-game micro-transactions.

Now we’ve defined a few of the factors that need to be present for a successful game, let’s take a look at a couple of business models p2e games employ to try and achieve success.

The NFT as Entry/Exit Model

Axie Infinity is honestly the biggest bag of shit I’ve ever seen. The only thing it has going for it is that it was early, and was one of the few games that were playable and with some sort of economy when p2e mania broke out in 2021. This wouldn’t bother me, except that I see so many projects copying the Axie Infinity business model, which we’ll call ‘NFT as Entry/Exit’.

The NFT as Entry/Exit model is simple. In order to play the game, I must purchase an NFT, this NFT is my character. I can enter the game with a ‘developed’ character (high skills/stats etc.) or an entry-level character, either way, I’m going to have to fork out for the NFT.

The objective for me then is to then level up my NFT through training, breed new NFTs etc. etc. with the hope of selling them further down the line for me.

The game generates money through the sales of these NFTs (usually taking a few per cent in transaction fees) but there are many issues with this business model.

1. It relies on an ever-increasing demand for NFTs. Axie Infinity is purely playing a Ponzi game, more people need to be added to the user base, to acquire the NFTs at an increasingly higher price in order for the ecosystem to sustain itself, otherwise, people end up losing money playing it. This is one of the reasons Axie Infinity will not succeed — it’s not sustainable. Eventually, it will encounter a death spiral, in which demand for Axie’s decreases, and therefore no one plays the game, resulting in less demand for Axie’s, ad infinitum.
2. It has big barriers to entry. One of the saddest things about Axie Infinity is that it has resulted in offices of Filipinos, being paid by wealthy westerners to play the game. These gamers have their risk mitigated — as they don’t pay for the NFTs themselves, but they also experience no upside from their success. There are many reasons that this has happened (and perhaps due to power laws in the economy it’s inevitable to some extent) but one reason is that the barrier to Axie’s is high and, due to the issue above the risk of putting in the time to level them up and sell them for more is also high.
3. It’s not fun. This is just a jab but Jesus have you ever played this game? It’s fucking mindnumbing. I’m convinced the only reason anyone plays it is for potential financial upside, nothing else.

Is anyone playing Axie for the gameplay?

So the NFT as exit/entry, is, at least as a standalone source of revenue, is not a great one, let’s take a look at a different model, which, when combined with this strategy, can greatly increase a play-to-earn projects chance of success.

The Marketplace Model

When I was younger, I used to play Runescape. This game was incredibly addictive, so addictive in fact, that I would spend hours upon hours, clicking virtual trees, chopping them down so I could perform virtual fletching on them, converting them into virtual bows, before performing magic on them to turn these bows into gold (no need to add the virtual there.)

Marketplace in traditional games.

What makes this fascinating as a model is that real work is being done. I’m investing time to produce an asset (in-game gold) that, has some value. I could use that gold to buy items I converted, or if I was so inclined sell it on eBay for ‘real’ money.

Jagex, the developers of Runescape, however, didn’t really see much upside from the productive activity occurring on the platform, aside from potentially improving their conversion of free to paid members. Also, from a players point of view, it’s very difficult to monetize your time, selling gold to eBay is clunky — you also have to find a buyer.

If we were to recreate Runescape in web3, we could provide a much more frictionless route for players to monetize their time, as well as enrich the pool for development resources (equivalent to the Jagex revenue stream), ensuring longevity for the game. Let’s see how.

1. Create a virtual asset. In traditional games, assets are created through privately owned code. In Runescape, there was some algorithm that decided given the quality of my axe, my woodcutting level, and the type of tree I was cutting, a rate at which logs would be added to my inventory. In web3, the concept is the same, except instead of logs being delivered by privately owned code, they are delivered in the form of ERC-20 tokens, via the blockchain. The blockchain can decide at what rate I generate these tokens, in the same algorithmic way that privately-owned code can. These tokens would then be deposited into my web3 wallet. An asset I own — not the company.
2. Create a liquidity pool for this asset. In traditional games, trading in-game assets was either impossible, difficult or only possible with other in-game assets. For example, I could trade my logs for in-game gold, but not $USD. Watch as we perform real-life alchemy here, by bringing life to a whole new economy. As a developer of Runescape.web3 I could create a new liquidity pool with $LOGS (Runescape logs) and $RSCAPE (The Runescape native token). This has not cost me anything to do. $LOGS is a new token, currently valueless, and $RSCAPE is a token that belongs to my treasury. Now keen woodchoppers can harvest $LOGS and trade it on the LP for $RSCAPE. The magic of crypto and Automated Market Makers also means that I never have to find a buyer for my $LOGS, the AMM dictates the price based on supply and demand. If I release a new quest for my game in which everyone needs to build a wooden fort out of $LOGS and demand suddenly increases, the price of $LOGS will rise, woodchoppers will then double their efforts to capitalise on the new demand and the price will reduce to a fair level.
3. Profit. As the play-to-earn game, I can profit from these trades, ensuring the longevity of my project. By charging a small transaction fee for each in-game trade that takes place, I can direct these funds back into the development wallet for the project, hopefully creating new features, quests, gameplay modes etc. to keep the game fun.

Ah, the glory days of chopping trees…

I'm super bullish on games that utilise some sort of marketplace economy (in a way that works) because I believe it allows games to build on a far longer time horizon than typical games of the past. Whereas large studios have to release a new iteration of a game every year (where everyone’s characters reset) in order to be financially stable (it doesn’t make sense to bang development resources into a game that everyone has already bought) with p2e that's not the case at all, the more people play the more revenue you’ll generate. It creates a virtuous cycle of more gamers > more revenue > better gameplay > more gamers > more revenue.

This model also drastically reduces the barriers to entry, as you don’t need to buy, or rely on a specific NFT increasing in value in order to profit, or have fun. You can enter the game for free, start producing some kind of asset and get a taste of what the ecosystem has to offer.

Of course, the marketplace model, doesn’t conjure ‘real’ money out of thin air, there has to be some kind of value in your native token, and this is determined by the number of people buying and selling it (for in-game transactions), but what it does do is unlock infinite possibilities of monetisation (for developers and players) of the game.

The play-to-earn space is something we are passionate about at Lithium. Sure there is a lot of shit, but there are also some great projects out there, and by analysing the fundamentals of these projects, we think we can deliver some great launches to our investors.

If you liked this article and would like to learn more about the play-to-earn economy, let us know and we’ll do a deeper dive into different elements of it.

Much Love

Tom, Team Lithium x