Tl;dr Tokens in Gaming

Just a quick one to get through some of my thoughts on trends in crypto :)

This week, I was fortunate enough to speak at Pocket Gamer Connects Seattle on a Web3 panel. The subject was the exciting world of tokens and how they empower communities and users. Okay, it was exciting to some, but we were less hype based on our approach than your normal crypto degen. Less Gary Vee and more meat and potatoes as we went into the use cases of each token and how the end user benefits.

Since it was a short panel, it would be perfect to sum up the three layers of tokens - Governance, Utility, and Non-Fungible tokens. So, without further ado.

Governance tokens

Let's start with what I think are the most interesting from a consumer (maybe investment😅) standpoint and, as of right now, the most substantial incentive for an end user. These tokens can be incredibly powerful and are already seen as the backbone of Decentralized Autonomous Organizations (DAOs).

Governance tokens are cryptocurrencies that represent voting rights on a blockchain. This is done by distributing the power of making major platform decisions from a centralized structure to an entire community.

The concept is simple - if I own this type of token from a company or project, I get a real opinion on the direction and execution. Depending on how many tokens I get, I get a louder voice. This leans heavily on tribal checks and balances and can bring in new mechanisms to change how voting happens in organizations. For example, rather than having every vote equal to one vote, you can make any additional ownership of votes by a single holder have diminishing returns. This is a mechanism to block hostile takeovers and the dreaded centralization. This would incentivize ownership from an investment standpoint but stop individuals from taking over business operations. Regardless, this represents greater optionality.

Of course, the value and direction of your opinion are important, but communication is key in rallying others to get behind it. This is a double-edged sword since you can derail or torpedo the project by alienating other contributors with differing views. This is likely why you see so much movement within the Web3 industry. Individuals with deep skills and understanding of the space hop from one project to another, looking to find others with similar visions and direction.

Governance has nothing to do with governments

Verdict

I will have to come clean. I love the idea as a token consumer rather than an issuer, especially in gaming. Making successful, high-quality games is unbelievably difficult and has a low hit rate for those who have done it for their careers.

Game development is highly contextual, with solid teams needing to be on the same page. I’m slightly iffy about allowing external voices to dictate direction without this context. Also, those with great ideas and feedback are a part of the game development process - either on the team or talking to them. Adding governance tokens to your project allows a money component that grants access and certain rights.

If these don't sound exciting, they should! It's your chance to get into the ground floor of the next set of billion-dollar (or more) tech companies... But that comes with a HUGE risk. These tokens have the highest probability for regulations to change their legal standing, which is currently not a financial instrument... but damn, they sure sound like one. I would steer clear on issuing them.

Utility tokens

Next are your "basic" utility tokens, which can have many different purposes but fundamentally help regulate a specific economy. They are the digital currencies of web3 - imagine them being the new digitized fiat currencies of the world, with different platform solutions being the "countries."

In f2p games, these would be the traditional currencies you earn or purchase in-game, with an emphasis on hard currencies.

Theoretically, this helps keep the economic ecosystem decentralized and become a healthy, user-driven economy. I say theoretically because the early attempts in web3 gaming token economies thus far have been less than ideal, with many relying on ponzinomics. Meaning token prices stabilize or grow when new players enter the ecosystem and drive demand. Without that demand, prices begin to falter. Then, people start selling because they fear losing value due to an inflating supply..

While these are not designed to be investment vehicles, the above demonstrates why many speculators expect a token's price to rise with the demand for it and use it as an investment. This should be considered when designing for a web3 economy, as products will encounter many motivations and behaviors in approaching user-driven economies.

Verdict

These are much less iffy than governance tokens, mainly from a regulation standpoint. However, it's easy to imagine that many games will have token economies in a few years, and many new studios will be founded with the help of token sales.

But... I would wait to add it to my own game. I would like to see a project succeed at creating a viable long-term user-driven economy before jumping into something with such high risk.

From an economic standpoint, doing this with your product will require deep economic knowledge. Gone will be the days of the "numbers person tweaking supply/demand events in your game. Instead, you will need proper econ knowledge to tame these systems.

Another reason you may want to pump your brakes is you will expose yourself and your community to seriously volatile market risk. The crypto markets are headed into a frosty winter, but that doesn't necessarily mean a specific game should be hit as dramatically as the market. Welp, too bad, and in all likelihood, you will lose more value than the rest of the market. Building a lasting product and the value of the entire project halves in a few weeks is not the best feeling.

Since we are on the topic of the speculative value of a token, we have to look at how you aim to use your token so you don't pass the Howey Test. You're considered a security if you answer yes to either of the questions below.

1. Does the token offer its holders an opportunity to contribute to the startup’s capital and to have a share in its profits? 2. Does the fundraising procedure of the ICOs involve investment in a project whose profits are solely generated from the efforts of individuals other than the creators or founders of the project?

Lastly, this is strictly on a company focus. Moving forward, your company's valuation is directly impacted by the valuation of your token(s). This exposure can be hazardous for early-stage companies that will likely raise future rounds. In addition, you will have to consider your token's valuation when fundraising, an additional variable that takes on added market risk.

NonFungible Token

This is where things can become very interesting but highly conceptual.

Non-fungible tokens, or NFTs, are digital assets that are provably unique. Additionally, they can be used to represent both tangible and intangible items.

To give a real-world example, I'll use sports cards. There are only so many printed each year, with some specific cards printed less, like a limited run of signed cards 1/100. This scarcity and novelty drive the higher valuation of these unique cards. Additionally, better players are in more demand; therefore, their cards can be sold on a secondary market for higher prices.

What drives this is the non-fungibility of the cards themselves. That means you may have the same card with the same year, maker, and player, but each card could have a varying value. Grading in the card market now exists because not all things are made the same.

Also, over the years, the survivability of said cards has been low. Look at this Honus Wager card designed and issued by the American Tobacco Company (ATC) from 1909 to 1911. This was part of its T206 series. Only 50 to 200 cards were ever distributed to the public because Wagner refused to allow the production of his baseball card to continue. Back then, these cards came in packs of cigarettes, and he didn't want children to buy cigarette packs to get his card.

Because of this scarcity, coupled with one of the greatest players in baseball history, this card has sold for over $6.6m. It's pretty good for a flimsy card from the 1910s. As of now, you can't do that with digital assets. That is until now. You can copy the traditional card system if you like or try your hand at digital art with truly limited prints. If you want to add scarcity, you could have some amount of randomly generated "decay" of the image or outright destroy it in a given time frame.

NFTs are much like cards but with additional functionality. Rather than being tied explicitly to a physical collection, you can grant legal rights of ownership of digital property. This may sound small, but the applications are expansive, especially as we move our personal representation priorities toward our virtual presence over our physical. These tokens will become a paradigm-shifting technology.

Verdict

NFTs are the initial intro for most people to experience blockchain technologies, specifically through crypto games. BUT... not all games. You need depth to your meta that makes sense for the technology. Does your game have a heavy diversity of items and characters? Does it have a crafting system? How about a breeding system? These make sense in leveraging the tech to deliver great UX, allowing the ownership and trade of these things. Not extra lives in a match 3.

Creating real-life analogs to digital systems can now happen. Tying the fantasy of gameplay with actual uniqueness. From a ledger standpoint, players can do some cool things since the token's history can now be a part of the game's design.

This can potentially be the world's most widely used medium of commerce. Again, as the changing trend of digital > physical presence continues to grow, NFTs will become more critical in expressing who you are and what you've done. You may not be an earlier adopter, and that's fine, but you should understand who is and why. As Millennials and Gen Z begin to carry much of the

Look only at a recent survey on US high school graduates' employment intentions. It might or might not surprise you, but the average Gen Zer said that becoming a creator is roughly 3x more preferred than a "typical" career path. Again, this may be a different employment path, but this is the future.

Anyway, this was supposed to be a quick one, and here I am, a few hours into typing. I hope you enjoyed it. As always, let me know if you have any questions or comments.