The Dark Side of Play-to-Earn: Exploring the Negative Impact of In-Game Monetization

Table Of Content

Share:

This target is focused on exploring the dark side of Play-To-Earn dApps.

The recent crypto bear market has provided a valuable lesson to different kinds of investors. The seasoned players have learned the importance of liquidity management, and new entrants have witnessed the consequences of a sagging market. In the last quarter, Bitcoin, the largest and most well-known cryptocurrency, has lost over 25% of its value. This bear market has been characterized by a loss in investor confidence with liquidity being drained from the market, increased regulatory scrutiny with the entire FTX fiasco, negative sentiments regarding the future of crypto and blockchain technology, etc.

Most of the economic and finance experts attribute this fall to the unnecessary hype and speculation that allowed artificial price increments of many cryptocurrencies from late 2017 and early 2018. Others believe that the downfall is due to the maturing of the market and the growing realization among people that valuations of the majority of crypto projects are not backed by sound fundamentals. Regardless of the reason, the current market is extremely volatile and poses a huge risk to new investors who plan to enter.

However, in the midst of all this crypto market spectacle, there is one category that still holds significant momentum, and it is the ‘play to earn’ class. Despite the failure of popular P2E projects such as Axie Infinity, Crypto Kitties, and even STEPN (in the move-to-earn category), the play-to-earn buzzword is still making rounds, and a whole new bunch of projects with P2E models are continuing to launch in the crypto space. 

A current example of such a project can be ‘Gala Games’ powered by the cryptocurrency $GALA. Despite having no whitepaper and no concrete tokenomics framework, the token has surged 130% on the year to date (YTD) basis. 

This article aims to uncover the loopholes of current P2E projects and how their token economic models are designed to benefit only the short-term users. We will also discuss the issue with a neutral perspective and highlight the key events due to which a P2E token price is bound to plummet with the currently applied frameworks.

The Shortcomings in P2E

Play-to-earn or P2E for short, typically refers to a business model where players can earn real-world or in-game currency by playing games, completing tasks, and performing different activities. This in-game currency is usually the project’s native cryptocurrency and is used to reward users. These tokens can then be swapped and withdrawn as real-world currency. But of course, the mechanics are designed such that exits are minimal, compelling players to rotate the earned currency in game and increase their standings. 

Let’s explore some of the reasons why this model is unsustainable and lacks a proper economic viewpoint.

  1. Prioritizing “Earn” Over “Play”

To start off, the biggest reason why the majority of the P2E projects fail is because they develop and market the ‘earn’ aspect rather than focusing on the ‘play’ aspect. They do not have a real product to show and they eventually tie the vision and growth of the project with the token instead of an interesting gameplay or sound in-game mechanics.

In addition, when the project is marketed as play-to-earn the behavior of users is such that they play the game specifically to earn and not for entertainment or leisure. This behavioral aspect of users plays a crucial role in determining the long-term growth and value of the project or, in other words, the token price. As users focus on the earn feature, sooner or later, their exits are inevitable, and this consequently affects the long-term value of the token.

  1. Flawed Economic Framework

Secondly, the economic frameworks of P2E projects violate the basic economic concepts of supply and demand. The reward tokens of majority of the P2E projects have uncapped supply, which means an unlimited amount of tokens can be minted and distributed to users. Economics 101 suggests that unlimited minting of tokens increases the circulating supply and leads to inflation while causing the value of the currency to decline. 

Now one might argue that these projects have burn mechanisms installed so that the circulating supply is reduced as rewards are accumulated. However, at a low level, it is pretty obvious that if the net impact is not increasing, then how are all the users generating returns? To be able to generate returns in the form of tokens, the net emissions must be positive, which means more tokens minted than burned.

Although the token price can stay afloat if the buying pressure is consistent, but again it can only happen if the token has sound utility, which is not the case with these projects. So regardless of the amount of rewards a user accumulates by playing the game, if the token value decreases over time, there is no incentive for the user to keep playing.

  1. Illusion of Sustainability

This brings us to the next point that how the number of new users play an important role in keeping a P2E project afloat in the short term. Let’s take Axie Infinity as an example to illustrate the point. The majority of the new capital inflows or purchases of the $SLP token (Axie’s reward token) is when new Axies are purchased/minted. This not only creates a buy pressure on the token but also reduces circulating supply as the $SLP proceeds are burned.

However, the framework is economically flawed because as the growth of new users tend to decrease there is no influx of new money or in other words, no buying pressure on the token, therefore it plummets in value. On the flip side, as the number of new users increases, the accumulated rewards also grow, which means that now more people will be dumping the reward tokens at the market, thus creating a classic Ponzi scenario.

With a declining token price and an increasing number of users, it becomes very difficult to maintain the same level of return because you now have to mint more tokens which translates to more token emissions and a further price decline. This death spiral causes a lot of players to lose interest and leave the ecosystem, and as they take their exits, the negative compounding effect on the token price becomes huge.

The $SLP token price of $0.002 from an all-time high of $0.36 and STEPN’s $GST token price of $0.015 from an all-time high of $7.8 are some of the examples acting as supporting evidence for their flawed economic framework.

Conclusion

In conclusion, play-to-earn projects have become an increasingly popular business model in the crypto space, but they are not immune to the volatility and challenges of the broader market. Many projects have struggled to establish a sustainable token economic model and have focused on the "earn" aspect of play-to-earn rather than the "play" aspect. This has led to a lack of real products and has contributed to the decline of token value in a bear market.

Furthermore, the unlimited minting of tokens in these projects can lead to inflation and ultimately decrease the value of the token. Additionally, play-to-earn projects often rely on a large and active user base to drive engagement and token usage. But in a bear market where users may be less likely to engage with these projects and instead focus on preserving their existing assets. This can lead to decreased demand for the token, further driving down its value.

At a micro level, there are a lot of other reasons why current P2E models are flawed such as protocols not re-investing their revenue in the ecosystem, underdeveloped unit economics to generate returns for each and every user in the long run, not tying the reward token to a sustainable in-game utility, etc.

also read Liquidity Challenges In Illiquid Marketplaces

More Audits

Infiltrating the EVM: Advanced Strategies for Blockchain Security Guardians

Learn advanced strategies for blockchain security guardians in this groundbreaking article series by BlockApex Labs. Gain insights into the Ethereum Virtual Machine (EVM), smart contract vulnerabilities, and thorough auditing techniques. Stay ahead in the evolving world of blockchain security and prevent financial losses with comprehensive knowledge. Join us for the article series and course today.

ZeroLiquid Protocol - Audit Report

BlockApex (Auditor) was contracted by ZeroLiquid (Client) to conduct a Smart Contract Audit/ Code Review. This document presents the findings of our analysis, which started on 11th July ‘2023.

Rise & Fall of Proof of Work: Is Proof Of Stake The Inevitable Answer?

Consensus algorithms are undoubtedly a major building block of blockchain technology. By definition, no single party can control the operation of a blockchain network, so consensus algorithms are relied on to achieve a common agreement.

Lightlink Bridge: BlockApex WhiteBox Code Review Report

the source code review of Lightlink Bridge Validator and Keeper. The purpose of the assessment was to perform the whitebox testing of the Bridge’s validator and Keeper before going into production and identify potential threats and vulnerabilities.

Cryptocurrency: Cutting-edge or Criminal?

As the positive hype around cryptocurrency increases, so does the negative. Many argue that the very benefits of decentralization and anonymity result in it being favored for use in a host of illegal activities. However, is outright banning a viable solution?

Unipilot Final Audit Report

In our first iteration, we found 1 critical-risk issue, 4 high-risk issues, 1 medium-risk, 1 low-risk issue and 1 informatory issue. All these issues were refactored and fixes have been made. A detailed report on the first review can be found here.

Cream Finance Hack: What Motivates Hackers to Return Stolen Funds?

From an outsider’s perspective, returning millions of dollars worth of funds after successfully pulling off a complicated exploit is, at best, admirable, and at worst, foolish. What could be the motivation behind such a decision?

Liquidity Challenges in Illiquid Marketplaces

Illiquid Marketplaces is a common problem with various underlying factors. Information asymmetry, where one party has more knowledge than the other, makes it challenging to establish agreements and facilitate transactions. Complex market structures, with intricate trading rules or inadequate infrastructure, can hinder liquidity. Small marketplaces with fewer users naturally have less liquidity. Fragmented marketplaces, where sellers impose rigid terms, create barriers for potential buyers.

Curve Finance Hacked, $570k Stolen!

On Tuesday, 9th August, Curve Finance suffered from a DNS attack causing theft of a whooping $570,000+ USD.

1 2 3 10
Designed & Developed by: 
All rights reserved. Copyright 2023