The revenue-sharing model in many play-to-earn (P2E) games with rental economies has created infinite selling pressure– but it doesn’t have to be that way forever.
The amount of money pouring into the P2E gaming space for the last year or so has been jaw-dropping. Gaming-related NFTs generated $4.8 billion of revenue in 2021, representing around 20 percent of the year’s NFT sales. On top of that, the total market cap of in-game fungible currencies was in the tens of billions by year’s end – and is still growing.
But if you’ve been watching the long-term value trajectories of in-game fungible tokens, you may have noticed something funny: driven by high inflationary pressure, many of them are trending down, showing no signs of reversing course anytime soon.
Indeed, it seems that something about these gaming economics, or gamenomics, is not supporting the growth of long-term value. The field is new and experimental so nobody can claim to have definitive solutions to this problem. Still finding new ways of approaching and structuring in-game economics could lead to better outcomes in the long run.
Axie Infinity’s Smooth Love Potion ($SLP) has been steadily losing its value since the beginning of 2022. (Source)
Why Are So Many P2E Gaming Currencies Rapidly Losing Their Value?
It’s no secret that traditional gaming communities have taken issue with P2E gaming. And while there are several different reasons for this, part of the issue is high starting costs. Players have to obtain expensive NFTs before they can start participating – for instance, the absolute rock-bottom cost of the three Axies that you’ll need to start playing Axie Infinity was $84 – but it can cost a lot more.
These costs are on the expensive side, even for gamers in the Global North. But for P2E players in the Global South – who are much more likely to rely on gaming income to pay for essential expenses – these costs are simply prohibitive.
So, to address these high starting costs, games and their communities created rental systems – or scholarships, as they are known. These enabled experienced players who had abundant gaming NFTs to lend them out to new players who had none – in exchange, for a share of their in-game earnings. This has been revolutionary for players in the developing world, who often rely on their in-game earnings to make ends meet.
For the most part, this system worked. Renting NFTs out to new players seemed like a win-win: players who were previously priced out of a gaming ecosystem gained a point of entry, and players who had NFTs to spare got a new source of income.
However, over time, the balance of revenue between NFT owners and renters seems to have resulted in virtually infinite selling pressure.
NFT Rental Systems Can Create Unsustainable Economics for Fungible Gaming Tokens
Before diving in, I think it’s important to acknowledge just how novel all of this is. The whole P2E gaming space is practically brand new – and as such, there are no real authorities on the space. Rather, the Pegaxy team and I are testing how to find the best outcomes fully aware that we need to be agile as the gaming dynamics evolve. All creators in the P2E space are pioneering a completely new front, and need to be prepared to iterate constantly as this technology develops. What I can offer, however, is the perspective we’ve developed using the data that we have.
It’s also important to note that the concept of NFT rental doesn’t cause inflation in and of itself. Rather, selling pressure comes from the way that these rental systems interact with other aspects of the in-game economy, as well as players’ individual lives.
For instance, let’s look at the way that revenue is typically distributed between NFT lenders and renters. Often, lenders receive 30% of the in-game currency that renters earn while they’re using borrowed NFTs.
Again – this revenue-sharing model is not an issue in and of itself. However, because many NFTs renters rely on their in-game earnings to survive in the physical world, they exchange their in-game earnings for fiat currency shortly after they receive them. Effectively, this means that 70% of in-game currency generated each day is sold straight away.This selling pressureis what leads to inflation. And left unchecked, the problem can worsen as more players participate.
How to Fix Broken Gamenomics
Fortunately, there are several solutions to this problem. And looking forward, it is possible to fix these types of broken gamenomics for the future – if not retroactively.
One method of reducing inflation is to reverse the revenue sharing models employed by NFT rental systems – so that, for example, lenders would receive 70% of profits, while renters would get 30%. Practically, this would mean that a smaller number of tokens would be sold each day in exchange for fiat currency.
Any transition to this practice needs to be managed carefully to avoid users who depend on P2E earnings suddenly facing a drop in their income. The resulting reduction in inflation should balance out so that the token recovers value and keeps users’ income whole.
An additional anti-inflation solution is to introduce a token burning mechanism into a game’s economy. Using these methods, games can gradually increase the value of their tokens without shocking the system. And this approach is receiving some advocates: Axie Infinity’s recently-introduced token burner destroys both $SLP and Axies.
Another method of avoiding the inflationary pressure introduced by NFT rental systems is by eliminating the need for these systems in the first place. For instance, Pegaxy has no starting costs for users – people can play the game with zero starting capital, and use their earnings to purchase their own gaming NFTs overtime.
Building a Culture of Solutions
The beauty of P2E gaming is innovation. Blockchain game developers have created systems that value people’s time, and compensate them for spending it accordingly. But the fact that the field is so new also means that there are few precedents. Being a creator in this space can feel like trailblazing.
Problems in P2E gaming economies can’t always be foreseen. But moving forward, new games can learn from the actions of P2E games past and present – we are a community that learns from each other. And together, we can learn how to build better gaming economies for the future.