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UTILITY TOKENS


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Token that fuels the Play&Earn economy

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TL;DR Overview

For this blog, we argue the need for blockchain-based digital tokens in games.

We will discuss transformation into digital economy and metaverse from demand and supply side as a backdrop, define digital tokens, explain the need for utility tokens in games, and deep dive into utility tokens, their utility, values, and potential pitfalls.

Table of content

  • Demand side — naturalized to Metaverse
  • Supply-side — Digital products democratized
  • A neglected area
  • The Solution: Token
  • Types of tokens
  • Utility Token (ft. EVE online)

Demand side — naturalized to Metaverse

Over time, gaming has evolved from packaged cartridges for Nintendo to mobile games where multiple users spend hours in a shared virtual space. Nowadays, people call this shared space a ‘Metaverse’, but, in the game industry, it has always been there in the name of ‘Massively Multiplayer Online Game’ or MMOs.

In this MMO world, social clubs, markets, and economies have formed and prospered, at least more than a decade prior to the dawn of the Metaverse. Thousands of forums and communities on Reddit, Facebook, and Discord, filled with enthusiasts who like to talk 24/7 about matters exclusive to the games. Furthermore, the game item marketplaces like Steam’s Community market booms with millions who like to have their hands on the latest swords and armors. According to DMarket, a skin trading platform estimates the skin market is $40 billion a year.

We may call these phenomena a fad and participants weirdos. But, there are clear signs that this is quickly seeping into our lives.

We are often surprised by how much money and time we spend on digital spaces. For instance, you are likely to be subscribed to at least a few of the digital native services like Netflix, YouTube premium, Slack, Spotify, etc..

We are getting more accustomed to paying more for these services. Interestingly, most if not all of the values created in these platforms are intangible. They never touch the physical surface of the earth but these subscriptions all cost more than a physical Costco membership card which costs 60 bucks a year.

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The rise of digital consumers has only accelerated over the COVID Pandemic. Locked out in spaces only connected digitally, we’ve all failed to resist paying for digital services. We are practically living in the metaverse, and the boundary between the virtual and the real world is blurring. Using virtual and augmented reality, avatars, and lifelike computer imagery, the digital sphere will further erase the boundaries between people’s online and physical lives. Thus, the rapidly growing digital economy and its importance in our lives feel only natural.

Supply side — Digital products democratized

As digital transformation expedites, the public becomes increasingly more adept at using powerful tools and skills to build digital products themselves. For a long time, these grassroots digital productions suffered a lack of access to the market. But, today in many digital verticals, we are witnessing a change. Diversified supply channels with low or no barriers emerged for creators to easily find their patrons.

A good example would be YouTube. Many talented video creators broadcast their video content and reach millions of audiences without the help of mainstream media channels.

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A similar trend applies to other digital media products. For example, you can draw a cartoon and publish it via Naver Webtoon, the world’s largest webtoon publisher, to monetize. Some of the hottest webtoon artists and YouTubers are raking in millions. Likewise, web novels, community moderation, or any other digitally-oriented works have their markets now.

A neglected area

However, there is a neglected vertical where the users’ time and efforts are not as appreciated as in other products: Gaming. Gaming is one of the largest digital sectors and where millions of people actively invest their time and money.

For the entire decade, gaming generated more revenue ($180 BN in 2020) than the movie and music industry combined. Also, gamers spent longer time than any other digital activity. e.g. average gamers spent 12 hours weekly playing and watching games last year, according to limelight network, a research firm. Considering additional hours gamers spend in game communities in likes of Discord, it would easily make a single most time-invested digital activity.

Despite its prominence, the game industry maintained a strictly unilateral relationship where developers supplying content and gamers buying them. Much of gamers’ time and investments were barred from turning into a value.

Ever growing influence of gamers in the game industry

User-generated gaming is still in its infancy and there are still barriers. It would be mere a pipe-dream to expect general gamers to start publishing homemade MMO games, as creators do with YouTube, Webtoon, etc.

But we cannot deny the contribution of gamers to the game industry’s stellar success. Even though the upstream development is still at the developers' dish, the downstream rely heavily on users’ contributions.

Most of the hit game titles today are MMOs. Thus, it is not just the game content and its design that attracts millions of gamers, but the social networks therein. Imagine Facebook without friends, Twitter without retweets. Social graphs are existential parts of digital life and gaming is no exception.

It is the community and social inclusion that makes playing games so tantalizing and you open your wallet for that shiny skin to show off to peers around you. Most gaming business models are built on these communities.

Even though gamers cannot build a Fortnite or PUBG themselves, Epic games and Krafton would not have survived without these gamers’ social activities downstream. Gamers deserve rewards.

0*cPL2QLN5Y9x8_SMADiscord serves one of the most popular game communities

The Solution: Token

How can we effectively reward gamers’ value additive activities?

That’s where tokenomics comes in.

Introducing tokens in games will be an effective way to reward gamers. Tokens can be a badge for achievement, medium of exchange, or proof of membership, and the contribution of the gamers to the game can be quantified as and rewarded by the tokens. Minted on the blockchain, the tokens will be powerfully portable, tradeable, and verifiable without intermediaries.

This is why we are seeing numerous attempts by game developers to integrate the token economy within their games. But, it will be crucial for the game developers to design a robust and sustainable token economy for the tokens to remain attractive.

The history of tokenomics on the blockchain may be short but has been abounding with innovative approaches.

Types of tokens

Blockchain-based tokens can be either non-fungible or fungible.

Non-fungible tokens (NFTs) are unique codes stored on the blockchain, which make them verifiably rare. On the other hand, fungible tokens are identical in shape and value, so they can be exchanged for one another, like the dollar bills we use to shop.

NFTs are a separate topic worth a lengthy discussion, so we will focus on the fungible tokens for now.

Every token carries different utilities. But we think there are three types of tokens: security, governance, and utility.

  • Security tokens: A tokenized form of traditional securities that have underlying financial assets but with much-enhanced portability, security, and transparency leveraging blockchain technology.
  • Governance tokens: Token that grants its holders various rights. Most typical rights include voting and many token holders on the major PoS blockchains are actively involved in such voting.
  • Utility tokens: Tokens that deliver straightforward benefits in the platforms or products (applications). The best example would be in-game currencies which are used to purchase skins, items, and packages.

The security and governance tokens are addressing financial issues, while the utility token enhances convenience in a particular digital economy.

For this blog, we want to dive deeply into the utility tokens, especially in line with gaming.

What is Utility Token & Why do we need them in games?

The utility token seems similar to the cash currencies, which can be obtained by paying real money. The dual economy of in-game currency and cash currency is not a new thing in games. The in-game currency is used in many activities inside the game, while cash currency is used for more premium content, such as skins, boosters, subscriptions, and so on.

Often this dual economy is not interconnected. Most games let you buy in-game currency with cash currency, but not the other way around. In EVE Online, a SiFi spaceship MMORPG famously known for its realistic in-game economy, PLEX (a premium currency that you can buy with real money) is exchangeable with ISK (the in-game currency) and vice versa, but you cannot turn PLEX into real money. In either case, there is a separation of real and the in-game economy.

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The utility token, on the other hand, connects the two economies, unlike the cash currencies currently used in games. The utility token produced by in-game activity can be traded like a real asset in the digital market, and the utility token bought in the market can be used in-game to facilitate more in-game activities. It creates an economic loop that runs through both the real economy and the in-game economy.

As discussed earlier, the distinction between real and digital space and the economic activities between them is getting more blurry. The utility token can be a key for the game industry to join the trend. Finally, with the introduction of the utility token, the value produced by the gamers in the digital space can now be recognized in the real world. Axie Infinity, one of the fastest-growing blockchain games in the market, is proving to the world how the activity inside the game can grow, even to a level where it can sustain people’s real life.

Furthermore, this decentralized monetization can draw more players into the game, expanding the community and the market further through the viral loop, word-of-mouth, or any other community-driven initiatives. All of which will add more value to the game.

How blockchain adds value to the utility tokens

Unlike the conventional in-game currency, utility token has one big, and obvious, difference: it operates on the blockchain. Blockchain is a decentralized network of machines that provide a high level of security, transparency, and hosts trustless transactions.

The main role of the utility token is to bridge the in-game economy with the real one. And the fact that it operates on the blockchain provides a huge advantage in terms of security.

When thinking of exchanging the conventional in-game currency or item with real money, the worry of getting scammed has always prevailed. However, in the blockchain network, the actual value transfer is transparently and verifiably recorded on the block, so that no one can forge or temper it.

Additionally, transactions will be processed autonomously through a smart contract, which means that it is free of unnecessary fee-hungry intermediaries.

Theoretically, there is no room for scams and only peace of mind, transacting utility tokens.

What will be the potential problems of using the utility token?

We now understand why we need the utility token and all the silver lining around it. But, what will be the downside of it? What kind of problems would occur when the utility token is implemented in your game, and what will be the solutions thereof?

The issue with the utility token is closely related to the ‘Play to Earn’ aspect of the game. When the game has a strong drive for ‘Play to Earn’, it can divide the players into two groups: those who play to earn, and those who play for fun. The ‘Play for Fun’ players are what we are used to seeing, but the ‘Play to Earn’ players bring a whole new equation to the table.

  • In the conventional game economy, the players demand the resources, and the developer supplies them. Developers can actively regulate the supply of resources is somewhat vague ways by monitoring the player's activities.
  • In the ‘Play to Earn’ game economy, usually the ‘Play to Earn’ players supply resources, while ‘Play for Fun’ players demand them. As the players take both roles of supplier and customers, it is difficult for the developers to intervene when the prices are fluctuating. (Lassiez Faire!)
  • Moreover, when the game contents reach maturity, and there is no content to burn the resources for, the decrease in resource demand can drastically decrease the price, which can lead the ‘Play to Earn’ players to leave the game.
  • Labor migration can also be an issue. The ‘Play to Earn’ players who don’t have loyalty to the game, can easily pack up and leave to find a more profitable game.
  • Lastly, the game should be fun even to the ‘Play to Earn’ players. Again, EVE online can give us some insight into this issue. EVE Online is a free-to-play game, but players can buy the 30 days premium subscription with PLEX. Technically, players can enjoy the free subscription by farming ISK and converting it into PLEX. But for some people, this farming can be boring, and they must spend their precious time on boring farming rather than into much more interesting content. Now, EVE Online prohibits buying real money with PLEX, which means that they don’t have a ‘Play to Earn’ economy anymore. Nevertheless, the statement stays the same. Those who are farming for ‘Play to Earn’ should still have fun while doing so. Otherwise, it is hard to maintain the loyalty of the ‘Play to Earn’ players, who are an essential part of the game economy.

Tackling these problems, developers should keep two things in their minds.

  1. The game should have an economy with long-term sustainability
  2. The game should be fun and have contents of great quality to retain.

Long-term sustainability has been an issue with Axie Infinity. Currently, the ever-increasing new players fill the demand of the Axis, the in-game NFT pets that you use to play the game, and the ‘Play to Earn’ is relying on that demand. Against the speculation of a future decrease in new player demand and content maturity, which might lead to a decrease in demand of Axie, SkyMavis posted roadmaps introducing new utility to their Land NFTs, Soulbound Axies, and such to provide a vision for the long-term sustainability of the game.

Also, Having a loyal player base is essential in securing a stable in-game economy. The entertaining game content with great quality will be a great drive for players to stay with the game and to build loyal communities. At the end of the day, if the boundary between the ‘Play to Earn’ and ‘Play for Fun’ players is blurred, and all the players are playing the game for both earning and entertainment, it would be optimal.

And these are the challenges for the game developers facing the rise of the digital economy and blockchain gaming.

They should not just implement the blockchain network in a preexisting system, but should deeply consider the impact of the new game economy, and develop a structure that can sustain such a sophisticatedly interconnected relationship between the in-game and real economy, and, by doing so, shall prove their value to the market.

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UTILITY TOKENS was originally published in League of Kingdoms Official Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

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