Do tokens really matter in Web3 games?

In this article, Vader Research explores the role and design of tokens in Web3 games, and how game tokens differ from stocks.

**Written by: **Vader Research

Compilation: Deep Tide TechFlow

For Web3 games, tokens can make it easier for creators to fundraise and plan their next move. However, the design of tokens has always been a difficult problem, and most founders are too pursuing tokens, ignoring the playability of the game itself, which eventually leads to the failure of the project. In this article, token economics consultant Vader Research explores the role and design of tokens in Web3 games, and how game tokens differ from stocks.

Why do games launch tokens?

There are several reasons: fundraising, incentives for players, and payment currency.

Fundraising

Issuing tokens is better than going bankrupt, Issuing tokens in a bull market is actually pragmatic, and you get plenty of FOMO money from retail investors and VCs.

Incentives for players

If Uber started in 2013 and gave me a $10 stake every time I used it, I would sell my car and become an Uber fanatic. Rewarding players with tokens increases user engagement, retention and spending.

Value capture problem

However, there is a problem with all tokens: why would anyone buy your token? Why do holders hold and not sell? What drives the value of your token?

They buy your tokens because they expect the game to be successful, and that success will be captured through the tokens — just like stocks, which capture value through dividends to shareholders or share buybacks.

A game can be very successful, but how do tokens capture this value?

• Repurchase → use the proceeds to repurchase tokens;
• Pledge → distribute proceeds (i.e. dividends) to stakers;
• Pay Currency → Force players to pay in tokens.
• Regulatory risk → buybacks and pledges may cause your tokens to be considered "securities";
• Product/User Experience Risk → Forcing players to leave the platform to buy tokens via CEX/DEX may lead to high churn.

Tokens vs Stocks

Your game becomes so successful that you want to be acquired by Activision Blizzard, but the token price doesn't capture that value, token holders are rightfully outraged, but there's nothing they can do about it - unlike shareholders, token holders have no shareholder equity .

Utility Tokens

The biggest mistake of utility tokens is "low volatility utility tokens with variable supply". What happens if tokens fail to capture value and are constantly issued?

Of course it will crash because it will sell off due to non-stop inflation.

You can capture some value for utility tokens through the aforementioned methods, but you will only dilute the value of the main token, NFT or equity, like this will only slow the bleeding, but not cure it.

Semi-stable tokens

The concept of semi-stable coins is problematic. Let's start by looking at the way a currency is pegged to $1: If a token exceeds $1, mint more tokens and sell them to build up a dollar reserve. If the token is below $1, use the USD reserve to buy back the token.

When people are selling tokens and the tokens are under $1, if you run out of dollar reserves, you're screwed. UST collapsed, even though it was backed by LUNA, Lebanon's decoupling, because they ran out of dollar reserves. The peg is only available for net exporters like Saudi Arabia.

Payment Currency

A tradable payment currency is required to allow players to trade game NFTs. It should have deep liquidity, be listed on most exchanges, and have low volatility. Using USD-based stablecoins or L1 native coins (ETH, AVAX) is an ideal solution.

No need to reinvent something new here, every semi-stable or utility coin crashes. Also, you should have non-tradable soft and hard currencies like in F2P games to be economically flexible.

Currency Control

Everything you can do with tokens - you can do with NFTs. In a real world economy - having your own currency controls inflation. In Web3 games, you control the inflation yourself, you control the supply of every game item that is produced and traded.

Who wants you to issue tokens?

• Venture capitalists → exit liquidity early (sell in the market) + they also ask for equity;
• Market makers and exchanges → charge fees;
• Token economic advisor → charge fees;
• Lawyer → collect fees;
• Speculators - mining and selling airdrops.

Web3 game developers should not focus too much on tokens, they should focus more on overall design:

• Tradable and non-tradable items;
• Progress system;
• Reward allocation (skills, time, cost, opportunity);
• Item pricing and supply planning;
• Player characters etc.