Fixing NFT Game Economics: Gladiators & Lumberjacks

Sam Peurifoy
9 min readJul 5, 2022

Play to earn is dead. At least, 2021’s hyperinflationary version of play to earn is dead, and most other web3 game economies are flailing. Where to next? Outlined below is exactly what to look for or design around when building a sustainable future for web3 gaming.

Content related to this article was also discussed on a podcast with Shrapnel here.

Source: wombo.art

I’m going to outline a clear path forward for games looking to incorporate the positives about web3 gaming while mitigating the negatives. Sustainability is the name of the game, and fiscal irresponsibility through aggressive money printing (I thought we left fiat to get away from this) has been running the show for far too long. Let’s get back to principles, systems, and real risk for real reward.

Of Gladiators and Lumberjacks

I’m going to crudely divide the entire world of player types (and thus, game environments) into two bins. We’re going to call one bin the Gladiators and the other bin the Lumberjacks.

Gladiators are players that are willing to risk assets in return for some potential greater reward. These are people that step into the arena, enjoy the grit of the sand between their teeth when they get stomped into the ground, and get back up the next day to rise stronger and dominate the competition, taking home all the beans.

Gladiators are thus amenable to game types that require real risk for real reward. Viable game types could include battle royales, racing competitions, arena-style RPGs, or even leaderboard-based single-player adventures. The native gameplay loop of these involves some concrete notion of a winner and a loser. The native economic loop of these, necessarily, should then also involve some concrete notion of a winner and a loser. This implies that value by a participating party¹ should always be at risk of absolute loss.

Lumberjacks are players that are not willing to risk any assets in return for any amount of reward, no matter how great. These are people that diligently perform rote tasks, take comfort in the safety that reliable work provides, and keep showing up to ensure they are steadily progressing without volatility.

Lumberjacks are thus amenable to game types that require no risk for a nominal reward. Viable game types will mostly be RPGs due to the caste-like social structure inherent to many RPGs, though RPG-like elements for Lumberjacks could be added to any of the Gladiator-viable game types. The native gameplay and economic loops of these games should involve some notion of a laborer and a purchaser. Meaning, the Lumberjack should be incentivized by some purchasing party to perform rote taskwork in exchange for some nominal reward, without risk. This implies that no value belonging to the Lumberjack is ever expressly at risk², as the risk is offloaded to some other player (the “purchaser”) who contributes capital to the game in order to acquire the materials produced by the Lumberjack.

Armed with definitions³, we now turn to solutions. We’ll just solve the entirety of web3’s most popular & misunderstood sector, easy, right?

The Gladiator’s Economic Model

Let’s start with the Gladiator’s Economic Model. This model has two objectives:

  1. Participant inputs must be greater than or equal to economy outputs;
  2. The economy has a responsibility to drive real risk to zero via soliciting external sources of revenue.

Put more simply, the game must never emit more tokens than it’s taking in via participation costs, and it should aggressively seek to subsidize those costs by way of secondary revenue streams (e.g. marketplace fees, advertisements, cosmetic sales). You should imagine this, practically, as some arena-style game in which all participants must post some entry fee to play, and the winner(s) take home an amount roughly equal to the sum of those entry fees paid.

Ideally, the arena managers (the game developers) would then sell cosmetics, take marketplace rakes, or consider accepting sponsors in order to subsidize those entry fees as much as possible to improve player returns and reduce risk. Again, ideally, the arena manager should actually be incentivized to act in exactly this way because their financial exposure to the venture should be entirely limited to some locked supply of game ecosystem tokens that will ostensibly rise in value as the game’s popularity grows. When game developers begin to take incentives in fiat purchases (e.g. if cosmetics are sold for USD instead of GAME) and value starts to leak out of the ecosystem, this case is substantially undermined.

The end-state of this economic model should be:

  1. A mass of players using the marketplace, collectible hunters, and advertisers driving external revenue into the ecosystem;
  2. Real player fees for gameplay being driven to zero by ecosystem subsidies derived from that external revenue;
  3. Game developers earning lucrative long-term gains on locked allocations of an appreciating token that grows in value with the game’s popularity, sustainably.

Crucially, this model also fails if there are insufficient traders in the marketplace, too few collectible hunters, or low advertisers participation to drive any meaningful revenue to the ecosystem treasury. Arguably, in the “web2” world, this would mean that a game has failed if it has not accomplished that key level of momentum in the first place. Web3 should not materially differ here. This is defensive and intentional, so that even in the worst case scenario, the game economy must remain balanced (as fees paid = fees distributed).

The Lumberjack’s Economic Model

On the other hand, the Lumberjack’s Economic Model changes the risk profile of all participants substantially. At a high level, this model’s objectives are to:

  1. Use secondary revenue sources to create compelling in-game opportunities for risk-seeking players willing to purchase materials to explore those opportunities;
  2. Enable risk-averse players to exchange their time and talent to produce materials as would be purchased by risk-seeking players in pursuit of opportunities.

Put simply, the game must never emit more tokens than it’s taking in via secondary revenue sources (e.g. marketplace fees, advertisements, cosmetic sales), and, if revenue is sufficient, it should seek to juice in-game opportunities as high as fiscally responsible in order to strongly incentivize risk-seeking players to purchase materials from risk-averse players and drive the economic loop. In-game, you should imagine this to look something like the game developer placing a massive chest of gold at the end of a dragon’s lair, and requiring that risk-seeking adventurers who fail during the challenge to repair their gear using iron that is mined by other risk-averse players.

Again, assuming that secondary revenue sources are strong enough to support this type of redistribution, game participants would be expected to maximize their risk-reward by driving more economic activity to chase ever-higher rewards. And, similar to the Gladiator’s Economic Model, game developers in this case should strive to conduct all transactions in the native GAME token and only take their own incentives in the form of a locked initial allocation of such GAME token.⁴

The end-state of this economic model should be:

  1. A mass of players using the marketplace, collectible hunters, and advertisers driving external revenue into the ecosystem;
  2. In-game rewards organized in a way that incentivizes high-risk behavior which must then be paid for by players who must make purchases from Lumberjacks;
  3. Game developers earning lucrative long-term gains on locked allocations of an appreciating token that grows in value with the game’s popularity, sustainably.

Identical to the aforementioned Gladiator’s Economic Model, the financial incentives here must fail if secondary revenue sources fall too low. This is defensive and intentional. A game must not continue to irresponsibly emit tokens in excess of revenue for an indeterminate period of time lest it fall prey to the hyperinflationary woes of the past.⁵

Monetization & Value Growth to the Token

Explicitly, the way that a game token accrues value and grows over time is to generate secondary revenue in excess of the financial incentives paid out during the course of gameplay. This can be described by:

  1. Game generates 1.01 GAME tokens in secondary revenue (e.g. marketplace transactions, cosmetic sales, sponsorships, etc)
  2. Game distributes 1.00 GAME tokens to players during the course of gameplay (e.g. ranked rewards, dungeon chests, subsidized arena entry fees, etc)
  3. Game converts 0.01 GAME tokens to a blend of trusted treasury tokens (e.g. BTC, ETH, USDC)⁶
  4. Implicit value of GAME tokens is the sum of future cash flows to that treasury plus the present gameplay-related utility of the token itself

Note that this entire loop is entirely dependent upon secondary revenue. And secondary revenue is dependent upon people caring enough about a game to actually play it, or sponsor it, or speculate on it. Contrary to the current zeitgeist in web3 gaming, no Ponzi-like lesser-fool schemes are needed to maintain a successful game. The game just has to be fun, popular, and successful, which, shocker, should have been the point in the first place.

An Ode to Rome, the Feudal System, and Historical Lessons

Credit to Caesar where credit is due, the original Roman colosseums used (almost) the same model as I’ve outlined above as the Gladiator’s Economic Model. Roman colosseums charged zero entry fee to viewers, on account of the politicians and aristocracy subsidizing the event in exchange for political clout. Sounds a lot like underwriting gameplay fees by using secondary revenue, right? With the obvious exception that the risk inside of a gladiator’s ring is quite a lot more “real” than the risk inside of a player-vs-player game, the point stands that the Romans mastered the concept of real risk for real reward, with secondary revenue sources subsidizing the whole mess.

And, credit to Charlemagne where credit is due, the medieval / feudal era that emerged principally as a result of decentralization of empires seems to have reared its head once again in the Lumberjack’s Economic Model as outlined above. It’s not far-fetched to imagine a future in the next 1–2 years where we’ll have virtual farmland⁷ owned by virtual barons tilled by virtual serfs, who will eventually save up enough in-game currency or fungible tokens to purchase the land they virtually stand on.

Dystopian? Perhaps. But so is a 60+ hour work week in a 10%+ inflation world without the ability to feasibly own a home or retire before the age of nearly 70. At least this gives us some options.

¹Except in the case of protocol-level intervention, which we’ll describe later. That’s a good thing, promise.

²Excluding the scenario where Lumberjacks may choose to lever their position by purchasing items that increase their work output, for example, a better axe. But this would imply that this specific player in question was probably a Gladiator all along, they just didn’t like any of the game types currently offered elsewhere and prefers the PvE-style elements of RPGs.

³I acknowledge that there are certainly edge cases, and some (or most) players will be a hybrid of the two archetypes I’ve crudely outlined in this dichotomy. For the sake of a clear argument, let’s agree to discuss those in another article.

⁴I recognize that developing games is expensive, and live-ops for games is generally a nightmare on a balance sheet, so games obviously have the option to only redistribute some portion of the incoming tokens into core game loops, and utilize some portion of the incoming tokens to conduct ordinary business operations.

⁵Some marketing emissions of tokens are always expected & necessary for acquiring users.

⁶Note that this model scales linearly with volume in the worst case (i.e. for every new player who joins, the game recognizes another 0.01 GAME of revenue), but exponentially with volume in the best case due to networking effects (i.e. for every new player who joins and trades with n other players, the game recognizes another 0.01^n of revenue).

Blocklords is actually doing this. And, from what I can see, I’m a fan so far. Excited to be both a farmer and a baron in two parallel lives.

Sam is the CEO of Playground Labs, a web3 protocol dev organization, and Partner & Head of Interactive at Hivemind Capital, a crypto-focused multi-strategy fund. Follow him on Twitter.

The views expressed here are those of the individual personnel quoted and are not the views of Hivemind Capital Partners or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Hivemind Capital Partners. While taken from sources believed to be reliable, Hivemind Capital Partners have not independently verified such information and make no representations about the enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Hivemind Capital Partners have not reviewed such advertisements and does not endorse any advertising content contained therein.

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Sam Peurifoy

Investing in & building new worlds. Views mine, not advice. Gaming VC @HivemindCap, chief tinkerer @xPlaygroundLabs.