Web3 Games Don't Need Tokens
(As a Tokenomics Consultant)
Governance tokens, utility tokens, semi-stable tokens, reverse-utility tokens, dual tokens, security tokens, fungible tokens, LP tokens, staking tokens…
The truth is your web3 game doesn’t really need a token
Token Benefits
Let’s look at the benefits of issuing a trade-able on-chain token
Fundraising / Incentive Alignment
Medium of Exchange
Fundraising / Incentive Alignment
Fundraising: Issuing a token in a bull market is a smart move. You get access to not only retail capital but also institutional capital (VCs) VCs move much faster if you attach token warrants to your equity round. Tokens allow you to raise capital so you can hire people to build a game. GuildFi raised $140m from public token sale in Dec 2021.
Incentive Alignment: If Uber gave me $2 of its own shares every time I used it in 2013, I would be a much more engaged Uber user; would never use Lyft, promote Uber to my friends and sell my car to always use Uber. You get the point - giving tokens to your users can result in higher user engagement, retention, spending.
Why do retail investors, VCs and players hold and not sell your token?
They all expect that your game’s success will be correlated with the token price. To achieve this, you must capture that value within the token. How?
You can either use fiat earnings to buy back the token, distribute earnings to token stakers or make the token the payment currency so the players can go to a CEX to buy the token to spend money in your game. We talk about value accrual in detail here.
However there are several problems with value accrual:
Buybacks: Using fiat earnings to buy back tokens can be considered market manipulation and be seen as a security (Regulatory Risk)
Staking: Distributing earnings to token stakers can be considered dividend payments and be seen as a security (Regulatory Risk)
Payment Currency: This is the worst option in terms of UX. To purchase a $5 cosmetics, the player would need to go to a CEX/DEX, swap USDT for your token, then send it to the blockchain, pay gas fees, confirm wallet transactions, etc. The potential dropout along the way is massive considering gamers have little attention span. (UX Risk)
Without any of the three methods, there is no way you can accrue value back to the token. Your game might become successful and earn you money but token holders won’t benefit from this - earning you a mob of angry retail investors.
Oh and token ownership doesn’t provide any legal rights that share ownership provides. No minority protection rights such as inspecting financials, voting on new share issuance, or voting on board members.
Medium of Exchange
A trade-able on-chain token is required for a player to purchase NFTs from the game developer or another player. A medium of exchange token should have deep liquidity and be accepted by most players, traders, exchanges.
Ideal medium of exchange currencies inside a game are USD-pegged stablecoins (USDC, USDT) or L1 native currencies (ETH, MATIC, AVAX).
If you want to benefit from casino chip effect of gaming currencies, you can always issue your own pegged coin and peg it to either USDC or ETH via smart contracts.
You should still have off-chain non-tradeable soft and hard currencies as you would in F2P mobile games. You don’t need to reinvent the wheel and try to make your own stablecoin. Focus on building a good game.
Utility Tokens Will Crash (No Exceptions)
The biggest fallacy is having a utility token. Game developers think that a tradeable in-game currency is necessary and desire it to be less volatile because this would be the token for the players.
Here’s the thing:
If your token cannot capture value, it will die off. Why?
The token is continuously being emitted whereas there are no sinks. The higher the circulating supply, the lower the price as players that receive those newly minted tokens will just sell them.
How to get more sinks?
Sinks = Earnings. We already talked about problems with value accrual above.
All utility, semi-stable, in-game tokens will crash no matter how successful the game becomes.
Conclusion
Token is a solution looking for a problem in web3 gaming. Tokenomics consultants, market makers and some VCs (not all VCs) want you to have a token due to conflicts of interest.
A value-accruing token might make sense if we’re in a bull market and you’re comfortable about having regulatory challenges. And you’re better off using a USD-pegged stablecoin or ETH as your payment currency.
None of this is financial or legal advice. If you want Vader Research to consult with your team on web3 game economy design, reach out to Vader Research