# The History of GameFi Tokenomics

*Is the industry doomed to engineer ever-more-intricate Ponzinomics schemes forever? *

By [fin.mursk](https://paragraph.com/@fin.mursksimplelogin.com) · 2023-06-20

gamefi

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![](https://storage.googleapis.com/papyrus_images/7d30396c6e599f80ce8a3f79bc242af6.jpg)

Author: [daniel@footprint.network](mailto:daniel@footprint.network)

While it’s commonly said that “GameFi” was coined in 2020 by Andre Cronje when he tweeted, “GameFi is going to blow up,” the true origin of the term is unclear. As it turns out, MixMarvel, a notable player in the blockchain gaming space, had discussed the concept in a conference on the intersection of blockchain and gaming in 2019. During this presentation, the company eloquently delved into the intricacies of GameFi, describing its potential to revolutionize the gaming industry and create new avenues for players and developers alike.

Either way, GameFi emerged during a pivotal juncture, capturing the confluence of various exciting developments on the blockchain, namely DeFi plus NFTs. While games like Eve Online, Second Life, and World of Warcraft had long boasted intricate in-game economies that occasionally spilled into the real world against developers’ best intentions, the crypto boom of 2020 truly set the stage for this new development. Hundreds of games began to emerge, each centered around the cultivation of easily tradeable, liquid assets that players could swiftly convert into real-world currency, all within a matter of minutes.

Amidst this newfound optimism, a tantalizing vision emerged — a vision where players could tangibly monetize their countless hours spent engrossed in virtual worlds, receiving substantial rewards for their dedication and community participation. The promise of GameFi seemed to hold the potential to transform gaming from a purely recreational pursuit into something lucrative, blurring the lines between work and play.

As the nascent GameFi ecosystem matured, its lofty promises encountered a sobering reality. Instead of sustainable, organic tokenomics, the industry became plagued by a proliferation of lackluster games buoyed by questionable practices. Ponzi schemes, automated bots, and gaming farms emerged, exploiting the system to extract profits.

The question now looms: Can GameFi ever fulfill its grandiose potential, or is it destined to be forever mired in price speculation and unsustainable volatility?

As enthusiasts and skeptics continue to debate, the future of GameFi remains uncertain, its trajectory dependent on the collective will of developers, regulators, and the gaming community. Only time will reveal whether GameFi will evolve into a sustainable and equitable paradigm where gaming and finance converge or if it will crumble under the weight of its own unrealized promises, becoming yet another cautionary tale in the annals of the gaming industry.

### b. Importance of tokenomics in GameFi

At the core of this digital transformation lies tokenomics — a term encompassing the intricate economic systems that underpin digital tokens. Tokenomics serves as the lifeblood of GameFi, offering players an array of incentives designed to captivate their imaginations and propel them further into the virtual worlds they inhabit. By integrating in-game rewards, tokens, and digital assets, developers have tapped into a powerful formula to ignite players’ passions and incentivize their exploration of fantastical realms. However, one must scrutinize the extent to which such extrinsic rewards truly enhance the gaming experience or simply act as a tantalizing mirage that distracts from core gameplay mechanics.

Tokenomics extends beyond the realm of incentives — it challenges the very notion of asset ownership within gaming. By leveraging blockchain technology, GameFi purports to grant players unprecedented sovereignty over their in-game possessions. The days of centralized authorities holding digital items hostage are supposedly gone, replaced by cryptographic keys that unlock a world of true ownership and control. Yet, one wonders if this newfound ownership is illusory, overshadowed by the inherent volatility and uncertainty of the cryptocurrency market. Can players truly rely on the value of their digital assets when exposed to the wild fluctuations of token prices and the fickleness of speculative trading?

The emergence of play-to-earn opportunities within GameFi further blurs the line between gaming and financial pursuits. The promise of monetizing gaming skills and time investment by earning tokens or valuable digital assets is undeniably enticing. However, it also raises concerns about the commodification of leisure activities.

Are we entering an era where the joy of playing is overshadowed by the relentless pursuit of profit? Does the play-to-earn model risk transforming gaming into an all-consuming economic endeavor, where the essence of fun and escapism takes a backseat to the pursuit of financial gains?

Yet, perhaps the most intriguing aspect of GameFi lies in its community-driven ecosystem. Tokenomics serves as the bedrock of this participatory framework, empowering players to shape the destiny of the virtual realms they inhabit. Through governance mechanisms embedded within tokenomics, players wield their voting power to influence game updates, propose enhancements, and guide the trajectory of the gaming experience. This inclusive approach fosters a sense of collective ownership and collaboration between players and developers. However, skepticism remains as to whether this democratic facade truly reflects the underlying power dynamics and decision-making processes at play.

While GameFi pioneers embark on this uncharted journey, the critical question of economic sustainability looms large. Tokenomics seeks to balance growth and stability, incorporating design choices such as token distribution models, supply dynamics, and inflation/deflation mechanisms.

As GameFi tantalizes gamers and investors with its promises of novel experiences and financial opportunities, it is crucial to approach this new frontier with both enthusiasm and discernment. While tokenomics fuels the imagination and hints at a potential revolution, its true impact on gaming and finance remains shrouded in uncertainty. As players and investors venture forth into this uncharted territory, they must navigate the intricate intersection of gaming and finance, cognizant of both the potential rewards and the lurking perils that await them. Only then can they truly ascertain whether GameFi’s tokenomics will truly transform the gaming landscape or become a mere footnote in history for gaming on-chain.

### III. The rise of decentralized finance (DeFi)

GameFi and tokenomics would not be possible without 2 innovations in blockchain that preceded it. First was the emergence of DeFi, then NFTs.

DeFi, at its core, aims to decentralize traditional financial systems, eliminating intermediaries and enabling direct peer-to-peer transactions, lending, and borrowing on the blockchain. When applied to the gaming industry, this decentralized approach introduces a range of opportunities and impacts the tokenomics of GameFi.

One significant aspect affected by DeFi in GameFi is the concept of ownership and control. Through the utilization of non-fungible tokens (NFTs), players gain verifiable ownership of in-game assets that can be freely traded. This feature provides players with a heightened level of control over their virtual possessions, imbuing them with a sense of value and exclusivity.

The introduction of the “play-to-earn” model is another notable consequence of integrating DeFi principles. GameFi ecosystems incentivize players to earn tokens and rewards for their in-game activities. This incentive structure aims to promote active engagement and inject value into the in-game economy.

The emergence of decentralized exchanges (DEXs) within the GameFi ecosystem is yet another impact of DeFi integration. These exchanges facilitate peer-to-peer trading of GameFi tokens, operating without intermediaries and contributing to increased liquidity. Players can freely trade their assets, creating a dynamic and vibrant marketplace within the GameFi ecosystem.

DeFi’s lending and borrowing functionalities also find their way into GameFi. Players can utilize their in-game assets as collateral to borrow tokens or lend their tokens to earn interest. This financial dimension adds depth to the GameFi ecosystem, encouraging economic activity and providing opportunities for players to optimize their virtual holdings.

Moreover, DeFi introduces governance mechanisms to GameFi, enabling token holders to participate in decision-making processes. Through voting rights, players can contribute to the direction and development of the game, fostering a sense of community and collective involvement.

Finally, DeFi standards such as ERC-20 and ERC-721 promote interoperability and cross-platform integration within the GameFi space. Players can utilize their tokens across various games and platforms, creating a seamless and interconnected gaming experience.

In conclusion, the integration of DeFi principles into GameFi brings about significant changes to the tokenomics of the gaming industry. It offers players ownership and control over their in-game assets, introduces new earning opportunities, enhances liquidity through decentralized exchanges, provides lending and borrowing functionalities, encourages community participation through governance mechanisms, and promotes interoperability across platforms. The synergy between DeFi and GameFi presents a world of possibilities, redefining the future of gaming and virtual economies.

### What are GameFi Tokens?

GameFi tokens are cryptocurrencies that are available on play-to-earn video games that use blockchain technology and are fueled by cryptocurrencies and NFTs 1. These tokens serve for NFT trading, reward players for in-game activity, and often also act as a project management tool 2. As the game itself develops and its users grow, the value of in-game tokens also increases 2.

Some of the best GameFi tokens that are worth knowing include AXS, SAND, MANA, ENJ, WHALE, YGG, MIR, ALICE, and BANANA.

![](https://storage.googleapis.com/papyrus_images/d64af2f95eecee7ac9f6b6eea6705a4e.png)![](https://storage.googleapis.com/papyrus_images/04124b3cadcb94cd782a37de7dcd67d2.png)

### NFTs and GameFi

After DeFi, the next big technology that enabled GameFi was the non-fungible token (NFT). These unique digital assets have revolutionized the way we perceive ownership and value within the gaming industry, leaving an indelible mark on the landscape of GameFi.

To fully grasp the significance of NFTs in GameFi, it’s crucial to delve into their intriguing history. The origins of NFTs can be traced back to the early days of blockchain technology, with the advent of the Ethereum blockchain in 2015. Ethereum’s smart contract functionality enables developers to create and tokenize unique digital assets, distinct from the interchangeable nature of cryptocurrencies like Bitcoin.

The true breakthrough for NFTs, however, came in 2017 with the launch of CryptoKitties — a blockchain-based game where users could collect, breed, and trade virtual cats. Each CryptoKitty was represented by an NFT, endowing it with a distinct identity and value. The game’s immense popularity not only clogged the Ethereum network but also showcased the potential of NFTs as a means of representing and trading digital assets in a secure and transparent manner.

Since then, NFTs have witnessed a meteoric rise, transcending the realm of gaming and making waves across various industries. Art, music, collectibles, virtual real estate — NFTs have become a conduit for tokenizing and trading an array of digital and physical assets. This surge in popularity has spurred the development of dedicated NFT marketplaces, providing platforms for creators and enthusiasts to engage in buying, selling, and collecting these unique tokens.

In the context of GameFi, NFTs hold immense significance. They empower players with true ownership and control over in-game assets. Unlike traditional gaming, where items are bound to a centralized server, NFTs grant players the ability to trade, sell, and even transfer their virtual possessions across different games and platforms. This opens up a world of possibilities, fostering a vibrant and interconnected gaming ecosystem.

The integration of NFTs in GameFi also introduces a new dimension of value. As NFTs represent scarce and unique items, they imbue virtual assets with tangible worth. Players can truly own rare and coveted items, leveraging their scarcity to generate economic opportunities within the GameFi space. This paradigm shift has given rise to the “play-to-earn” model, where players can earn tokens and rewards for their in-game activities, further enhancing the economic dynamics of GameFi.

Furthermore, NFTs facilitate the concept of authenticity and provenance within the gaming industry. Each NFT is cryptographically secured, providing verifiable proof of its origin, ownership, and transaction history. This transparency instills trust among players, ensuring that virtual assets are genuine and not subject to duplication or manipulation.

### II. Early GameFi tokenomics

**a. Early tokenomics models**

Among the various tokenomic architectures, the single-token model was one of the earliest and simplest. Notable examples include Crypto Zoon, Playvalkyr, Hashland, and Radio Caca, which relied on a single token to support all economic functions. We previously described [it in this article.](https://cryptoslate.com/gamefi-tokenomics-101-single-token-blockchain-games/)

A critical examination reveals both the allure and the inherent risks associated with this approach — which become obvious considering none of these games have survived the bear market.

The single-token model relies on a constant influx of new players or reinvestment from former players to achieve 100% external circulation. At its core, this model can be further

categorized based on the relationship between the game token and fiat currency. Let’s delve into these submodels and explore their advantages and pitfalls.

![](https://storage.googleapis.com/papyrus_images/16c0c924ce986cb2715ad63cd8eec718.png)

**Model A: Input USD + Output Game Token**

In the early days of the GameFi boom in 2021, the use of USD as an input and game tokens as an output was prevalent. Users would employ USDT or BNB to purchase non-fungible tokens (NFTs) and engage in gameplay to earn game tokens. This model found traction not only in GameFi but also in DeFi yield farming. Its defining feature is a fixed entry price, while the earnings fluctuate with the token price.

The appeal of this model lies in the potential for a span Fear of Missing Out (FOMO) effect, particularly when positive momentum surrounds a project. However, this model also amplifies the token output and consumption, making it susceptible to an irreversible death spiral when the token experiences a downward trend. While solid projects may rely on real money to support the market and release positive news to attract new players, less reputable ventures often resort to rug-pulling tactics — using real money to accumulate tokens and distributing them to unsuspecting players. As a result, the single-token model under Model A tends to experience fast initial growth but has a limited lifespan. To navigate this terrain, players are advised to sell tokens while yielding and promptly divest when the price begins to decline.

**Model B: Input USD + Output USD Value-Based**

To counteract the inherent risks associated with the single-token model, a more recent iteration has emerged — tying the token’s value to USD. Under this model, the number of tokens a player receives changes according to the token price. For instance, if the game yields 100 USDT per day and the token price is $1, players would receive 100 tokens. If the token price decreases to $0.5 the next day, the player would receive 200 tokens.

This model offers players fixed costs and returns, ensuring stability in the face of fluctuating token prices. During an upward trend, the return cycle remains steady due to the corresponding decrease in token output.

Conversely, during a downward trend, players can expect a constant daily return for a short period. However, caution is advised as Model B often imposes lock-up periods, and the token price after the specified period may not align with expectations. Projects like Valkyrio exemplify Model B’s implementation, leveraging the new tokenomics model and the GameFi frenzy to attract a significant influx of users.

Model B provides a more stable income stream and extends the lifespan of projects. Token prices tend to resist sudden surges and plunges, allowing players to yield and hold tokens for a certain period to maximize profits. Once a slowdown in new player participation becomes apparent, it is advisable to sell tokens promptly.

**Model C: Input Game Token + Output Game Token**

In projects following the Model C tokenomic structure, both the cost and returns are highly correlated with the token price. For example, a game may require 100 tokens to play and yield 10 tokens per day. As the token price increases from $1 to $2, the cost and returns fluctuate from $100 and $10 to $200 and $20, respectively.

An illustrative example of Model C is RACA (Radio Caca), which serves as the exclusive manager of the Maye Musk Mystery Box (MPB) NFT. The involvement of Maye Musk, the mother of Elon Musk, and the support of Binance’s founder, Changpeng Zhao, attracted a steady stream of players to the project. In this model, early players benefit from rising token prices and draw revenue from the high entry costs imposed on new participants. While projects employing this model can achieve overnight success, they are prone to sharp spikes and drops in token prices. Their longevity hinges on their ability to retain a substantial user base. Therefore, it is advisable to join such projects at an early stage and closely monitor their capacity to attract new users.

As GameFi continues to captivate gamers and investors alike, understanding the intricacies of tokenomics becomes paramount. The single-token models, whether operating under Model A, Model B, or Model C, offer distinct advantages and face unique challenges. Careful evaluation, prudent decision-making, and a comprehensive understanding of these tokenomic structures will empower players and investors to navigate the complex landscape of GameFi, where opportunities for growth and pitfalls coexist in equal measure.

![](https://storage.googleapis.com/papyrus_images/7d2d946f6e414c56739088e5212e64ba.png)

**b. Dual-token tokenomics**

In the vibrant realm of GameFi, where gaming meets finance, a groundbreaking innovation has taken center stage — the dual-token model. This revolutionary approach, following the era of single-token games, has swiftly become the dominant paradigm in the GameFi universe.

The dual-token model first emerged in the early half of 2020 when Axie Infinity introduced Smooth Love Potion (SLP) as a means to alleviate selling pressure on its original game token, AXS. Following Axie Infinity’s lead, nearly all major GameFi titles adopted the dual-token economy.

![](https://storage.googleapis.com/papyrus_images/9824dcf388f0453d1c896ea73700eccb.png)

To comprehend the workings and rationale behind dual-token games, let us delve into Axie Infinity’s implementation of SLP. Prior to introducing SLP, Axie operated as a single-token GameFi, where players would input USD and receive the game token, AXS. With an influx of users and backing from numerous private equity funds, Axie thrived on a single token for over a year.

However, it became apparent to Axie that new users were essential for sustaining the project. Without fresh funds entering the ecosystem, the project faced the looming threat of a death spiral. To mitigate this risk, Axie introduced SLP in 2020. While AXS served its governance and staking reward purposes, players would use SLP within the game to breed new Axies and earn additional SLP. The development team adjusted the AXS-SLP ratio for breeding, as well as increased the amount of SLP required for reproduction.

Initially, the introduction of SLP worked as intended. AXS’s price surged following the incorporation of SLP, while SLP’s token price remained below $0.1 for several months. The influx of newcomers during the GameFi summer fueled an upward trend for SLP.

However, this trend proved short-lived, and SLP eventually fell into a death spiral. In response, the Axie team took steps to enhance community governance structures, aiming for a more decentralized approach. They also removed SLP as a source of PVE (Player vs. Environment) earnings on February 9th, effectively reducing SLP’s minting and supply. These adjustments resulted in an increase in SLP’s price.

The dual-token model has since solidified its presence, with one token primarily serving governance functions, granting holders voting power in community decisions, while the other token assumes in-game utility roles. In most contemporary games, players predominantly earn yields in the utility coin, which typically holds lower value, with a premium payout in the governance coin for ownership of valuable NFTs.

Apart from Axie Infinity, other notable GameFi projects such as BinaryX and Starsharks have embraced the dual-token model.

In analyzing dual-token GameFi projects, we can identify two distinct categories:

1.  Input Game Token + Output Game Token: In this model, recently launched dual-token projects follow the paradigm of utilizing one token as input and yielding the other token within the game. BinaryX, for example, employs governance tokens to initiate the game and offers utility tokens as returns, while Starsharks employs utility tokens throughout the gameplay experience.
    
2.  Genesis NFT Mechanisms: The initial phase of many GameFi projects involves the sale of Genesis NFTs on official platforms or partner platforms such as Binance NFT or OpenSea, attracting initial players. These projects then employ mechanisms to generate additional NFTs, thereby meeting the demand from new players while stimulating token consumption. Two prevalent approaches within this
    

### Problems with the dual-token model

As mentioned above, Axie Infinity was one of the first major innovators of GameFi tokenomics, yet even the dual token model proved insufficient to address the volcanic surge in demand and cataclysmic collapse thereafter.

“Probably, the first 10 to 20 thousand community members were playing for the love of it — collecting Axies and being a part of the community,” said Bailey Tan, Director of Ecosystem Strategy at Sky Mavis. Having joined Sky Mavis just 6 months ago, but with a deep expertise in GameFi, he speaks as an outsider when it comes to the initial few years of Axie.

“Then came GuildFi. They saw it was very profitable to run their businesses on top of Axie. I guess from the 10 or 20 thousand to when it grew to over 2 million DAUs, that’s when the narrative shifted. People were coming in for the profits. I think for any successful game, if you were to achieve it, it would have to have a sustainable virtual economy. The game development team is something of a central bank, building the mechanisms and expectations for the economy, whether it’s expansion, whether it’s contraction.”

Functioning as the central bank, however, is easier said than done. Besides the technical difficulties in integrating and testing virtual economies, the very idea of a central bank is viewed by some as antithetical to the principles of blockchain and GameFi.

“During expansion, when a game is running hot, there has to be some lever the team could pull to control this volatility — e.g. a price ceiling, where excess demand for the token goes to a treasury. When the economy contracts again, the treasury is useful for maintaining a price floor. In other words, a system that protects against volatility, similar to how real money works. I think that’s the end goal, many teams have tried that, but it’s still so new.”

### V.

GameFi is in its early infancy, having undergone only one major economic cycle. However, tokenomics experts and developers are overwhelmingly looking to engineer price stability and economic resilience into their virtual ecosystems.

Right now, the trends in the industry revolve around designing mechanisms to encourage player engagement and retention, so that more players stay beyond just the profit motive. To this end, many teams now strive for ways to balance the power of NFTs in order to make the game enjoyable for whales and low net worth players alike.

However, the main problem remains: Does tokenomics serve to improve gameplay, or does good gameplay serve tokenomics.

At the end of the day, there’s no clear answer. A successful GameFi title needs to be fun to play, while leading to a steady, sustainable and predictable source of income in the course of playing.

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*Originally published on [fin.mursk](https://paragraph.com/@fin.mursksimplelogin.com/the-history-of-gamefi-tokenomics)*
