Sense & Nonsense in Blockchain Gaming: Three Problems With Tokens

Transparent Mario Coin Png - Mario With Coins Png, Png Download ,  Transparent Png Image - PNGitem
Mushroom Kingdom’s Gold Coin faired well against Hedgehog’s massive Ring devaluation.

Currency plays a peculiar role in economic activity. Classical economists are fond of claiming “money is a veil”; it abstracts away the underlying economic activity it helps coordinate. However, we know all too well that money is only a veil until it’s not. Monetary economics is justifiably a subdiscipline, so it makes sense for “tokenomics” to emerge as something similar to blockchain. And like early monetary economics, tokenomics finds itself suck in a strange mercantile stage of development wherein a token’s highest order is to appreciate rather than facilitate transactions. Something akin to increasing net exports and not letting money “leave the system.” But more specifically, modern tokenomics falls prey to three problems:

  1. Fixed Supply & Fixed Supply Schedule
  2. A Means, Not an End
  3. Make-Believe Ownership

Fixed Supply & Fixed Supply Schedule

Price stability builds trust because it is predictable. A fixed number of tokens and a fixed schedule in which those tokens enter circulation handcuffs the ability of monetary policy to respond to inflation or deflation. When stability collapses, so does trust; look no further than the recent wave of stablecoin disasters.

In the spirit of considering money as a veil, consider the effects of fixed supply and supply schedules on something like Magic the Gathering. In this parable, imagine Wizards of the Coast announcing a fixed number of card packs for the next set and a schedule to sell those very packs (ex., one-hundred packs for sale one week after release, three-hundred the week after). If there were many players and thus high demand, prices would be prohibitively high. Without the ability to purchase cards at a reasonable rate, players might churn to other games; a high price isn’t always the profit-maximizing price. On the flip side, too many packs for a given number of players could mean low prices. It’s hard to imagine Wizards of the Coast maximizing profit if they “minted” cards at the cost of production rather than exploiting their monopoly on card supply; P doesn’t equal MC outside of perfect competition.

Optimal monetary policy adjusts based on the conditions of growth and contraction, while most tokens prevent any such possibility. 

A Means, Not an End

Economy designers generally model currency as a medium between activities rather than an end to itself, and economists do the same. Instead, however, cryptocurrency white papers spend more time on token distribution and allocation than redemption, ignoring that a currency is only as valuable as it can purchase. 

Packy McCormick, an equally entertaining and informative writer, deep dives into the business models of start-ups in his weekly newsletter, Not Boring. In Braintrust: Fighting Capitalism with Capitalism, he chronicles the model of Braintrust, a talent platform. Late into McCormick’s explanation, he documents the cryptocurrency “twist” of Braintrust. By using and referring talent to the platform, users can earn tokens. It’s never clear, however, what these tokens gate or purchase. Users on the platform may price services in terms of the token, but they’d only do so if the token has purchasing power in real terms. Packy writes that Braintrust may offer “hints at future benefits for token holders; these might be things like educational content, free software, or coaching.” If so, the token’s price reflects the value of these services. I find it excruciatingly difficult to believe these services are worth much, so, in turn, the token shouldn’t be worth much. Starting a fiat currency from the ground up is a daunting task, but the most important precept of any token-backed project should be to grow demand for assets priced in the token.

Blockchain games do better here by exclusively first listing goods in terms of the game’s tokens; the token’s price reflects the demand for these goods. In the case of Braintrust, the token’s price reflects a future expectation that users or the firms will find a use for the token. Rather than composing a minority of a given whitepaper, explaining why there’ll be demand for assets priced in the token should be the analysis.

Make-Believe Ownership

A stock represents both a governance right and a claim on dividend payments from a firm. More recently, markets segmented governance rights between Class A and B shares. B shares vote on governance issues while class A shares do not. Most blockchain games took note and immediately segmented governance rights into separate a token altogether. In this way, there is some sense of ownership. But so much of this token class stands on shaky legal grounds. Are blockchain governance votes legally binding? Over what issues do token holders have autonomy? Can they fire a CEO? Increase a token’s supply? Again, the entire issue of ownership is murky.

On the other hand, no form of token entitles an owner to dividends. If it did, tokens would fail to pass the Howey Test and be subject to SEC regulation. As mentioned above, a token’s current price represents present and future expected demand for the assets redeemable by the token. This is a wildly different value proposition from a traditional share which derives value as a claim to a stream of dividend payments. Far from “aligning incentives,” the different incentive structures result in different outcomes. Redemption incentivizes the price of the underlying assets to increase; this isn’t always in the best interest of the underlying product or service. However, dividends incentivize the growth of a firm’s profitability. Profit incentive finances and signals supply expansion. The supply expansion makes everyone better, whereas redemption results in something like what we see with the NIMBY’s homeowner movement. In translated terms, it might make sense for someone who holds a hypothetical governance token in Magic the Gathering to vote against issuing new packs of cards. It’s not hard to see why this would be destructive to the game.


As blockchain applications grow and fluctuate, monetary policy will increasingly come under a microscope. Vague regulatory guidance and short-run design decisions to build trust have forced awkward token design. Moving away from these constraints will produce sustainable applications while aligning incentives between token holders and users.

Questions From a Student

A truly fun part about being a Game Economist is that 3-4 times a year, you’ll get the odd Linkedin message from students wanting to do the same.

I did get back to him!

It’s incredibly gratifying to help set people on the right track, given I was asking for the same help years ago. There’s so little on game economics it forces aspiring Economists to cold-call people with the title on Linkedin. This blog’s mission is to grow the conversation and those participating in it.

Along these lines, a student interviewed a fellow Game Economist for their master’s thesis. They shared the questions with me, and they were a lot of fun, so I’m reposting them here with permission.

What would you say is the biggest difference between the virtual economy in MMOs and the real economy?

Let me talk about virtual economies more broadly. In some sense, there’s no invisible hand in virtual economies. A virtual economy does not exist without a central institution that creates it. A designer needs to craft each inch of a virtual economy and how it functions.

In the real world, the environment is exogenous – a given, with each agent optimizing around his or her utility preferences. An agent is still optimizing around their utility preferences in a virtual world, something we have ample empirical evidence for (thank you, Edward Castronova!).

If game designers were to design the real world, they could alleviate things like hunger instantly. But a game-developed world wouldn’t mean a lack of pain or difficulty. On the other hand, we observe optimal flow state comes from overcoming challenges.

If we were to think about MMOs versus other virtual economies specifically, it’s the prevalence of player-to-player trade-in MMOs. This gives rise to floating prices facilitated via auction houses and provides a whole new dimension of engagement.  

Why do you think players value virtual goods more than real ones?

I can’t entirely agree with the premise of the question. The same Magic the Gathering card will command a higher price in physical than digital form. This will shift as Wizards of the Coast brings more events online than offline (i.e., the Pro Tour) and expands their online offering (Cube Draft! Commander!).

What type of goods is the most desired in MMOs and why? (Functional, hedonic, social)

Done correctly, whichever goods the institution incentivizes players to desire the most. A game where I could not see other players’ cosmetics would probably sell fewer cosmetics than a story-based DLC model, ala Destiny. Empirically, when I observe most MMOs, vertical progression or gameplay affecting items are desired the most—progression gates content that arranges a social hierarchy.

How is a competition created in games like WoW, FFXIV, or Lost Ark?

There’s the meta-layer of progression mentioned above, which adds a competitive element to the social hierarchy. Progression provides straightforward UX to “move ahead”; it’s incredibly meritocratic or at least “time-o-cratic” in many ways. It’s unclear how Lindsey Lohan moves up the social ladder at her high school in Mean Girls. In MMOs, the answer is clear: spend more time grinding!

Some MMOs have dipped into real-time combat-based elements like Alteric Valley in WoW or arena’s in Lost Ark. This re-arranges the social hierarchy to not depend on time but on “twitch skill” with a decent helping of planning. What equipment and skills players enter the Valley or arena with are dependent not only on time spent grinding but also on the planning players undertake on skill tree choice and gear equipment.

Why do you think some players rather spend money on buying an already leveled-up account instead of playing the game themselves?

Sometimes the Wikipedia article is better than the actual movie. Buying high-level characters let spenders jump straight to the top of the hierarchy. They may be missing out on the “experience,” but everyone has a soft spot for shortcuts. 

Would you say that high-level players play a role in making new players buy the virtual currency in games?

It depends, again, on the institutions the designer has created and what that institution incentivizes. The more social matters, the more high-level players probably play a role in monetization. But a game like Candy Crush has much less social. If you were to remove Facebook Connect from Candy Crush, I don’t like revenue would change much in an A/B test. I love Gardenscapes, but some players on level 1,000 do not change my propensity to spend as a new player.

How can someone create a fun virtual economy for players when economics is one of the most boring studies?

I could not disagree more! Economics is the most riveting social science out there. Economists commonly refer to “the set of glasses” the discipline grants after careful and dedicated study. The economic model helps me organize and think systemically about my world. There’s a satisfaction in the ability to take a random observation and build a model of understanding around it. Something that was chaos becomes order.

The best Game Economist is someone who brings to bear the tools of economics on games. It’s what Gary Becker does for crime or Richard Posner for law.

What game has the best economy, in your opinion? 

I think of the best economies as ones that maximize the net present value of the game. Economies here don’t refer only to how many currencies a game has or the price of items. Economies also refer to things like the supply of content in a game. I have a couple of nominations: 

Valve’s Steam Marketplace

Valve deserves a lot of credit for bringing player-to-player trade to a broad scale. The auction house and UGC design have given huge revenue and engagements tails to the games that have adopted it. Valve’s titles continue to have strong engagement, including TF2, a 15-year-old game that survives on community rather than first-party content. 

Clash of Clans / 4x titles (Game of War)

Selling vertical and horizontal progression is expensive since creating supply is costly (i.e., new level cap, new MOBA character). Clash of Clans (CoC) monetizes based on timers for creating troops. CoC treats a given troop as consumable; a single troop has only one attack use before it must be re-generated. The hard currency players can spend on reducing the generation time for new troops is a nearly infinite depth sink. 4X games use a similar loop while adding on consumables like peace shields. The result is LTV in the seven figures. The lack of consumables and expensive card creation in Clash Royale has significantly harmed its long-term prospects.


Perhaps an odd choice here, but match-3 economies are well understood and tuned. Match-3 developers understand the “meta” of the genre: how do I optimize level difficulty against the speed at which I can create new levels? There’s beauty in the rigorous optimization problem, and it seems to be going well. Match-3 grabs 21% of U.S. iOS spend, with players approaching decade-long relationships with a single title. Candy Crush recently celebrated its 10,000th level.

Netflix Finds Its Game Nest With Single-Player, Not Live Service

Let the DK power run through you, Reed.

Netflix is seriously ramping its games division. As of February 2022, I scrapped ~25 game or game-related titles on Linkedin. Excluding Night School (+15) or Next Game (+125), Netflix Games probably approaches an internal headcount of ~50-60. With both studios, ~150-200 Netflix Game or Games related employees. At 14 titles, we’ve seen of things like Dungeon Dwarves and Krispee Street, highlighting small indie-based narrative adventures rather than big-budget AAA affairs. On the contrary, I’ve yet to see a pundit to suggest Netflix get involved in the recent game M&A spree. However, in an industry turning hard right on live service, Netflix is justified in turning left.

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In-Round Progression Is the Biggest Game Design Innovation in a Decade

Battle Royale and Roguelike are remaking game progression before our eyes. Popularized in earnest during the rise (and eventual pruning) of the MOBA genre, in-round progression mandates players accrue vertical power in the context of a single round.

MOBA sessions start with players farming in-round currency to spend on items that persist until the round or particular game is over. In addition to in-round currency, players earn XP that levels up characters for the round duration. Many teams secure victory by out-farming currency and XP relative to the opposing team; eSports commentators are fond of displaying progression charts during casts. A single XP chart becomes the scoreboard of the game and a big predictor of victory.

In-round progression completely alters the salary profile game designers pay players. If we think of rewarding player action with progression as a wage rate, in-round progression radically alters the incentives. Instead of optimizing for the long-run, in-round progression presents a 30-60min time horizon to players.

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Why I’m a Supply-Side Game Economist

Robert Mundell often remarked getting to tier 100 in the Battle Pass is harder than getting a Nobel Prize

Game monetization discussions tend to focus on what to monetize broadly (gameplay or cosmetics) as well as how to price it. As someone might imagine, these are crucial and foundational discussions to have. So naturally, therefore, it makes sense to invest a lot of human capital into optimizing them. Increasingly, however, I’ve become convinced that just making lots of stuff trumps all other optimizations. Instead of being an afterthought, supply-side considerations deserve to be front and center.

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“Community” Leads Us Astray

A few months back, a member of Biden’s campaign team appeared on CNN. The team member describes how the campaign managed to stay politically center: staying off social media. I tweeted at the time this was great advice for game devs.

The vocal members of any community tend to dominate the feedback. And as we know, this minority is not representative of the whole. Most anyone I’ve talked to will freely admit this, but we commonly ignore it when referring to the “community” of a game. For example, job postings for Community Managers emphasize social media management. 

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The Creator Economy Is for Anyone but Not Everyone

Ladies and gents. Israel Kirzner, the Avatar.

UGC platforms have hailed the rise of the Creator Economy™. Roblox, TikTok, and Youtube have democratized the creation of content, abstracting the costs of getting content to market. But we’ve assumed UGC cuts out content gatekeepers in favor of entrepreneurs. Everyone gets a warm glow when “the little guy wins”. And by all means, this appears to be true! Creators can single handily craft and distribute TikTok videos in seconds, not days or months. The barriers to Roblox creation are higher, but it’s a far cry from the rigamarole of traditional game publishing. The effects of UGC are profound: despite easing requirements with Early Access, Steam hosts 50,000 games to Roblox’s 40 million. It’s such a gap I made this handy chart to underscore the difference:

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Is There An Actual Case for Cyberpunk’s Delay?

Cyperpunk 2077 launched and it turns out the PS4 and Xbox One versions of the game were riddled with bugs. This has lead to an avalanche of omniscient pundits declaring “I told ya so!”. My personally favorite roast in this Miyamoto meme.

A delayed game is eventually good, but a rushed game is forever bad."  Shigeru Miyamoto - iFunny :) | Words of wisdom, Super funny memes, Funny  memes
Was Miyamoto around for the Wii U though?

Rushing development feeds into narratives around greedy firms. “If only they didn’t want so much money!” Much of this banter is comprised of cheap shots devoid of making real claims about what CDPR should have done. Should the game have been delayed an additional 4 months? 6 months? And if so, why? If the board really didn’t understand the scope of the bugs then the question turns to the organizational design CDPR. What organizational breakdowns led the lack of information the board had about the bugs in game. Were QA leaders not empowered to speak up or not trusted?

These are much tougher questions to answer. After all, as Pixar is fond of saying, “[Games] don’t get finished, they just get released”. The key question is when to release. There will always be bugs and there will always be new features to add. Ultimately, release timing is a cost/benefit decision. Relative to the additional development cost what increase in sales would we expect from a delay? Do we have ever higher margins from a 4 or 6 month delay? To be clear, Cyberpunk is already outselling all other CDPR games, hardley “one of the most visible disasters in the history of video games“. What further increase would analysts expect with what additional delay?