274: Designing a Play-to-Earn Economy

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​Well last night was pretty exciting.

The project I've been working on almost nonstop for the last two weeks finally launched: the token and economy for the new blockchain-based video game Crypto Raiders.

As of this afternoon the main token has a fully diluted value of about $50m, and there is over $2m of funds locked in the smart contracts I wrote, so I'm somewhere between elated and terrified. It's pretty insane.

So for today's Medley I want to talk a bit about designing an economic engine for this new world of video games!

If you've been following the insane growth of Axie Infinity, that growth is built on a new video game incentive model called "Play to Earn." Instead of just playing video games for fun, you also earn in-game cryptocurrency that you can trade out for other cryptocurrencies and even sell for Fiat.

It might sound ridiculous "who would pay for that?!", but games like Fortnite earn $2b+ per year from players buying in-game items that don't even give them any benefits. Imagine if most of that money being spent was flowing back to other people playing Fortnite? That's how Axies incentives work, and that's how Crypto Raiders's works too.

What I loved about this project is it blended my decade+ obsession with video games, and my new obsession with DeFi. An opportunity to bring everything I've learned about DeFi and token incentive design into a new video game that's already gotten a lot of traction.

So let's walk though designing a positive economic incentive structure for a virtual currency in a video game.

​The Goal

The goal of the economic system is to ensure that playing the game can be profitable, and that the value of players past work can increase over time.

So people need to be able to make money, and have the value of their work compound over time.

​Making Money

So to start, how do people make money. They make money by doing in-game work, like leveling up characters, completing dungeons, earning loot, and "breeding" new characters.

These things all take time, and they result in either increasing the value of tradeable characters (since higher level, better gear players can do harder dungeons and earn better loot), or they result in creating new value (getting new characters or loot to trade).

But for that work to have value, there has to be demand for the products of that work: characters, items, and in-game currency. So the game has to be fun of course, but there also has to be some kind of currency market reflecting the in-game activity. And there needs to be a use for that currency.

That's where the first token comes in: often called "Gold" but AURUM for us, SLP for Axie. It's a way to reward players for completing dungeons and doing quests, but it's also how they do any value-creation activities. Running harder dungeons, creating more characters, crafting, and anything else that creates value will require some AURUM. So players can either do the work to earn the AURUM themselves, or they can buy it on the market.

But, to buy AURUM on the market, there needs to be a market in the first place. Without a market for the currency, there's no way to make money playing the game, and no way to buy currency to save time.

So how do you create a currency market?

​Creating A Currency Market

It used to be that if you wanted to list a cryptocurrency for sale, you had to convince one of the major centralized exchanges (CEXs) like Coinbase or Gemini to list you.

Now, with decentralized exchanges (DEXs) like Uniswap and SushiSwap, anyone can list any token, so long as they have the funds to seed the liquidity for other people to buy.

Basically if I list AURUM and you want to buy AURUM, there needs to be enough AURUM in there for you to buy it without dramatically altering the price. In this case, we did about $100,000 worth of RAIDER as well as $100k worth of AURUM.

So now there's a currency market, great! But it's not very liquid. 100k is a good start, but more liquidity will help more people join in the market without creating crazy price swings. So you need to incentivize other people to contribute liquidity, too.

​Incentivizing Liquidity

When you trade cryptocurrency on Coinbase, you have to pay a small trading fee that goes to Coinbase.

When you trade on a DEX, most of the trading fee goes back to the liquidity providers. So by providing liquidity, you're making money every time someone makes a trade.

That's great! But it's not always enough of an incentive since you might lose some of the original value of your liquidity if the prices of the tokens vary too much.

That's why platforms will offer additional incentives for providing liquidity, which is what we did as well. AURUM is the currency for in-game activities and earning rewards, but we also created RAIDER to represent the platform as a whole.

Since RAIDER should accrue most of the perceived value of the platform, we wanted that to be the "hold" token. So we allocated 40% of the total RAIDER supply to be given out as rewards to people for providing liquidity to enable more people to trade between AURUM, RAIDER, and MATIC, the native token on Polygon (kinda like Ethereum).

Okay so now people have a clear reason to provide liquidity: they'll make money on trading fees and they'll get free RAIDER tokens. Yay! But we still have a problem. People will just dump their RAIDER tokens as soon as they earn them, driving the price down.

There needs to be a reason to hold on to them besides speculating.

​Incentivizing Holding

This is where the video game economics start to come back in a really interesting way.

We decided to allocate 50% of all in-game transaction revenue back to RAIDER holders, so long as they had their RAIDER tokens locked on the site for 3-12 months.

You can kinda imagine that like if you got a chunk of the revenue generated by Fortnite just by holding stock in Epic Games.

So now there's a clear reason to hold on to RAIDER. Long term faith in the game, plus earning rewards in AURUM which you can then use to play the game more.

The last variable, and the one we'll still need to tweak and figure out, is how much AURUM the game uses for various value-creation activities. That's what we'll have to tweak to figure out the right economic balance.

But with such a successful launch yesterday, there's now plenty of liquidity for people to turn their in-game work into real-world money as they play.

It's a really exciting new frontier for game design, one that prioritizes rewarding the community not just with a great game but also financially. There's going to be a ton more experimentation done over the next few years, and I'll be curious to see the different models that pop up.

But as more and more games transition to a P2E model, it's going to be hard to imagine spending long hours in games without one.

If you're curious to read more about the Crypto Raiders economics model, I wrote about it more in the launch post here. And this isn't investment advice, please don't spend your life savings on internet coins :)


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