Paid to Play?

The Metaverse or Web3 or what have you can be frustratingly ill-defined. This is fair enough to an extent; in the process of becoming, the thrill lies in seeing what emerges rather than prematurely limiting things with definitions. However, this openness can encourage utopian tendencies, where any request for specifics is dismissed as a lack of vision. Two features which are relatively well-established in sketches of the virtual future are pervasive tokenization and gamification, with predicted economic consequences that are shocking to the more hidebound. As an example, this article is a baffling mixture of sophistication, naivety and ignorance, at least to this middle-aged mind, but what really jumps out is this quote:

90 percent of people will not play a game unless they are being properly valued for that time,” Reddit co-founder Alexis Ohanian said in a podcast earlier this year. “In five years, you will actually value your time properly, and instead of being harvested for advertisements, or being fleeced for dollars to buy stupid hammers you don’t actually own, you will be playing some on-chain equivalent game that will be just as fun, but you’ll actually earn value and you will be the harvester.

How is this going to work? 90% of people will be rewarded for spending time playing computer games? Rewarded by whom? And for what? So many questions.

The article outlines what seems to be a classic capital/labour interaction where wealthy people buy game characters and then allow players in developing countries to use them to play the game and obtain digital assets which can be sold. The profits are then split in the traditional proportions. What are striking are how timeless this business model is, and how oblivious the participants are to that. Still, being unoriginal doesn’t make it unviable, and a knowledge of economic history is not necessary for success. However, if you are claiming to disrupt economic norms then some awareness of the past may be advantageous in benchmarking your claims. A lack of it also casts a certain amount of doubt on other economic assertions you might make.

According to my limited understanding, enthusiasts are usually willing to pay a certain amount to play a computer game, typically by purchasing a copy of the game outright. This is a straightforward transaction. The advent of online gaming has opened up other potential means of payment. You may be able to play for free as long as you are willing to be subjected to advertising, a business model which is well established in television. Alternatively, you can begin to play without paying but as you progress in the game and if you want to play it to the fullest you have to make in-game purchases.

None of these options are pernicious for what is a form of entertainment, as long as the charges aren’t excessive or overly reliant on addiction clouding people’s judgement, particularly in the case of children. However, the quote from Ohanian suggests he thinks these arrangements are exploitative and that players should actually be rewarded for the time they invest in playing. This wouldn’t amount to much as one man’s opinion but it seems to be representative of a strand of Web3 advocacy which posits a future where activities can be commodified and monetized to a much greater extent than they currently are, and to the benefit of us all. What isn’t clear is who is going to pay us for all this. The normal parameters of mutual exchange don’t seem to apply.

Let’s return to the game mechanics of Axie Infinity. The entry price for a character is reportedly $300. This is well in-excess of the typical price of a computer game, particularly given the majority of players are in the Phillipines, which suggests the entry price is driven by the expectation it is an investment that will earn a return. The characters can battle, earn the tokens which support the in-game economy and breed new characters. Apart from other players hoping to turn a profit, the market being sold into is made up of players who don’t want to go to the effort of earning these things and would rather jump to playing the game at a higher level straightaway. However, from the article it isn’t clear these people actually exist.

Those quoted readily admit it is currently a Ponzi scheme. Perhaps, with its reliance on new entrepreneurs as the buyers of characters, it is closer to pyramid selling, or maybe neither term is exactly accurate and it is something new. Anyway, even used loosely, Ponzi indicates there is something unsustainable about the market, but the implication is that while this is the current state of affairs, it needn’t always be so. But how would a different, more sustainable form of in-game economy function? How could the utopian view of Web3 be realized?

As a baseline reference it is reasonable to assume that the average player isn’t willing to pay much more than what has typically been the price of game purchase in the past — between $50 and $100, whether denominated in fiat currency or crypto. This is significantly lower than the price of characters in Axie Infinity, however we can expect money-making opportunities to drive the price of characters higher if there is scarcity. To resolve this tension, one can imagine a market developing where a basic character would be available at low, or even no, cost, while characters which have been evolved by game play would cost more. Players could basically pay to skip a lot of the effort involved in reaching higher levels of play. But would you really pay hundreds of dollars to do that when building up is the point of the game. Why jump to the end?

But perhaps Axies are already out of date. Here’s a positive write up of an app that promises to be the Strava of Web3. Again we have an awareness of the accusations that can be levelled at it:

That’s completely insane, totally unsustainable, and a giant Ponzi waiting to collapse. Right?

But while this creates the effect of openness and a critical eye, no explanation is offered to counter this view. Instead a curious argument is presented as to why this could be a breakthrough app:

I’m not the only one, too. The STEPN Discord is full of people talking about how it has helped them lose weight, live a better lifestyle, and spend more time with their dogs and families. I’m sure there’s some dark interpretation here about how our collective obsession with money is the only force strong enough to drive us to make positive changes but who cares. I’m having a ton of fun with it, my friends are having fun, people are being healthier, and we’re making money from it.

Losing weight, family time, being healthy — these are all admirable, but are normally things people pay for rather than earn money from. Yet there is no explicit acknowledgement of this potential inversion of economic history here. There is only a low-level sense of entitlement, that finally we have achieved the natural order of things. If economics is essentially exchange, and it is, there is no explanation of what is being exchanged or how. The only possible parallel is a vague one with real estate or equity, perhaps encouraged by the apparently irreversible rise in the value of both in the last decade.

There’s a pattern here that makes sense up to a point. You can follow a traditional model and pay some people to build your product and other people to market it. Or you can pay people with stock options to build and market your product. The idea that you can build a product and reward early adopters for playing and publicizing it is an attractive extension of this. But in conventional terms it can only work if only those early adopters receive (gradually diminishing) returns for their efforts.

There is nothing outrageous about people who see the potential in something before others making outsize capital gains as a result. But that isn’t what is being sold here. Instead, we are encouraged to believe everyone can benefit in this way. Consideration of how stock options function suggests this is misguided. If a start-up enjoys breakout success then the value of its stock will multiply, but at some point it will stabilize and no longer by a source of dramatic growth. Similarly, even if in-game tokens appreciate quickly as a game gains popularity there will be a point where this can no longer continue.

It may be objected that the stocks of the tech giants continue to rise so why can’t tokens do the same? Well, those companies at some point start to generate cashflow, serious cashflow, driving ongoing rises in the stock price. But the cashflow isn’t generated by stockholders in any meaningful way. It’s created by consumers, people who pay for the product without thereby somehow generating income for themselves. People don’t generally encourage you to buy stock to boost the value of their holdings; they encourage you to by the products the company makes. Yes, it is possible to have Tesla stock and buy a Tesla, it’s possible to have enough gains from Tesla stock to fund the purchase of your Tesla, but that can’t be the general experience if the company is going to make enough money to support its valuation.

Up to this point in time, any company has relied on a relatively small number of people holding equity that gains and retains value based on a much larger group of people buying the products of that company. The notion that the ratio of those two groups need not be so great, or indeed that the two groups can be exactly the same seems to underpin the promise of Web3.

Frank admission that games or tokens may be a Ponzi, or at least be in a Ponzi stage, is disarming and suggests an awareness of the potential pitfalls and criticism. Furthermore, it implies that this issue has been anticipated and will be overcome. But even if it were to be a phase that has to be endured, you would then expect some indication in the tokenomics of how the transition from Ponzi to stable generator of wealth is to be achieved. However, this doesn’t appear to be the case. There are complex and detailed explanations of how tokens will be structured, released and held, but there remains a lacuna regarding what the end-state, or stable state, will look like after the euphoria of the initial growth stage, and how it will be reached.

Actually that’s unfair. Eliason does sketch a path from unsustainable to sustainable:

This is how STEPN escapes the NFT breeding ponzinomics. If all the uses of GST help you earn more GST, they’re headed for disaster. But once you can spend GST to enhance your status in ways that don’t allow you to earn more, they might just make it.

So if the attraction of playing is investment and generating a real-world return there is no long-term future, but if any gains generated are simply part of the in-game economy then things could work out. This makes sense but there is still no indication of how you get ‘there’ from ‘here’.

Trying to map Web3 tokenomics onto actual fundamentals, there are three vehicles for monetization. The governance token is the equivalent of stock or stock options. It’s held by the owners, developers, early adopters and some random beneficiaries. There is a potential advantage that it distributes the benefits of a successful game more fairly in terms of who contributes to that success, so if you help marketing by playing early you get a little bit of the profits. However, there’s no getting away from the fact that the number of people benefitting is going to be a lot fewer than the game-playing population, and it is going to be concentrated among those who financed and built it. Web3 isn’t going to turn entrepreneurs into philanthropists. In terms of valuing the token, ultimately this has to be based on reliable cashflow, not initial froth and contrived structuring. The preference seems to be to make this a cut of in-game transactions, which themselves therefore have to be convertible to a form of money exogenous to the game. Instead of straight purchase of fees this model seems to be favoured as it maintains the benevolent illusion that it is the players making money.

The in-game token is used for transactions between players, or needs to be purchased in order to but the characters or artefacts required to play. This gives it the necessary exogenous convertibility. The source of the tokens tends to be some in-game activity, which makes sense in terms of pure gameplay; you earn game-money then spend on things you want in the game, perhaps things other players have produced, or items made available by the game itself, with the value of the token a product of the economics of the game. However, as the token is also an entry point of the game it has an external value as well, which is the crux of the sustainability issue. By making the in-game token convertible out of the game as well as into it, both the producers of the game and the players can make ‘real’ money.

This is achieved in tandem with the third monetization vehicle, the characters or artefacts which can be evolved or bred or ‘farmed’ in the game. It is not an original aspect of Web3 to sell digital products which have been earned in gameplay, and it’s not a crazy idea if it takes effort to obtain them, just as it isn’t as outlandish as it might sound to pay large sums for virtual real estate, as long as that property can deliver real cashflows. In the current phase of Web3, cashflows, and therefore the value of in-game tokens and artefacts, are driven by token generation and external conversion. In the case of STEPN, players can generate real income simply by walking round the park. Whatever technology you dress it in, it is an insurmountable fact that you can’t produce real economic value in that way. But in the initial gold rush, the mechanics of the game can create a situation where new entrants are prepared to by upwards of $1,000 to start playing, creating tokens and cashing them in.

That’s the ‘here’ situation, so what is the ‘there’ that needs to be reached for steady-state viability? Even if you try to persuade people the health benefits are comparable to a Peloton or a gym membership, there is a strong psychological barrier to people being willing to pay a four figure sum to join STEPN. It is compared to Strava, and Strava has struggled to create a profitable model, currently charging around $100 for a subscription on top of a free basic version. This is comparable with the game purchase price noted earlier. Though it’s possible that small, incremental in-game purchases may create a higher overall spend, much like kids in the 80s pumping coins into arcade games, it seems fair to conclude that token prices need to be geared to result in a total cost to play around that $100 mark. This would require more than encouraging people to spend tokens rather than cashing; the means of creation, the quantity in circulation and the incentives to exit would all need to be tweaked to produce the target price. In the case of Axie, character breeding seems to involve dull activity that most players would be happy to avoid while focusing on the more fun aspects, but in STEPN the exercise which creates tokens is the whole point of the game.

There are therefore four constituencies in a stable Web3 ecosystem. There are the game’s owners/developers who would be relatively small in number, and would derive income from a small percentage of in-game economic activity, which they would then extract while trying not to disturb the exchange rate of the game’s in-game token. The token model creates a second group of early adopters who get to share in revenue from the game in turn for promoting the game in its early days. Claims that this is a fairer arrangement are undermined by the fact those early adopters are mainly engaged in short-term speculation. The third group are players who are willing to spend their time creating saleable tokens and artefacts for themselves and their sponsors. This seems to have already taken the form of virtual sweatshops, and it’s unclear what game developers gain from sharing their revenue in this way, especially if the role is no longer to stoke the price of artefacts; it would seem more profitable to stick to offering in game purchases. The final group are by far the most numerous, the players, who ultimately must pay to play and forsake any fantasy that they are instead going to be paid to do so.

There is no obvious path from the current state of Web3 games to the scenario outlined above. The latter is not just an extension of the former, a more mature version; the two are fundamentally different. What is required is not just declining entry costs but a pivot from “everyone can make money” to “you’ll have to pay for that”; a complete change in the reason for participation. Furthermore, in any transition the price of tokens would need to be manipulated to attract players, sacrificing the ideal of the value being set purely by market forces.

But isn’t this supposed reliance on market forces illusory already? Whether in the current goldrush mode or in a stable equilibrium the tokenomics must be deliberately, consciously configured. The two are just different settings on the dials. It could be argued that if this is the case then a transition from one to the other is just a matter of changing those settings. However, this would be to ignore the extreme disruption this would case for participants and the challenge it would present to their motivations. There is no guarantee that the game-playing population would either survive that transformation or be replaced.

Criticism of crypto focuses, at least in part, on the motives of the participants, usually concluding that the peculiar mix of naivety and complexity presented by the crypto community suggests disingenuousness, that the whole exercise is a giant scam and indeed the faulty economics mean it can’t be anything else. Promoters of crypto can then be viewed as pitifully misguided or cynically manipulative, depending on taste.

Much of this is unnecessary. Analysis doesn’t require any great animus toward crypto and can even allow most claims made by its advocates to stand for the sake of argument. It fails on its own terms, and this failure is all the more conclusive if the positives are acknowledged. The technology is interesting as a mechanism and could be the basis for advances in infrastructure and processes. This in itself would be a significant achievement. But that doesn’t seem to satisfy its supporters. Value added through efficiency is not enough and is instead attributed to the tokens themselves; their mere existence somehow creates value, with the ultimate outcome being that everyone can make money.

The core problem for game tokens in Web3 remains the same as that of the original Bitcoin with the hope that it can at some point transform into a world currency. The very volatility which attracts speculation and drives its price rises deters anyone from using it as a regular medium of exchange; the greedy aren’t going to want to give it up when it’s going to the moon, and the risk averse aren’t going to accept something which drop significantly in value in a matter of hours. In Web3 as with Bitcoin there is not path between these two modes. The saving grace of the former is that at least the games might be fun.

There is something of the purity of Greek myth to this paradox; the tantalizing riches which are imaginable but impossible, always just out of reach. This is what makes it something other than a Ponzi or a pyramid scheme. Tokens are a means to generate theoretical wealth which can never be realized. Sure, money can be made trading on the periphery but the vast majority of the market is trapped unless some way is found to exchange their gains for goods. Hence the frenzy surrounding NFTs as a way of converting crypto holdings in to real assets. The only other option, to liquidate your holdings, would only crash the market. The situation isn’t dissimilar to a start-up entrepreneur who is bound to retain their stock as a sign of confidence in the company, until they are rescued by the generation of sustainable profits. For crypto there is no such cavalry.