Investment Chapter Author: Ryan Emmick

The Summer of 2021 has seen an explosion of digital assets, particularly in the form of profile picture NFTs, but as with any trend there are more interesting innovations happening behind closed doors that take more time to come to fruition. Right now, that’s Gamefi. Just as Ethereum and Defi have enabled vast new economic primitives and reshaped finance, so will Gamefi reshape how we play games, consume media, and entertain ourselves digitally.  


Until now, game developers have had full discretion in their world’s economic design. There are several types of game economies, from simple collectibles to full MMORPG worlds. These can compare directly to NFT collectibles today and the Gamefi universes in the near future. Historically the economies could be easily controlled as there were never real-world assets at stake, but now that Gamefi assets can be traded for real money, projects will have to seriously consider this responsibility.  

Imbalanced economies can lead to strange incentives for players. For example, if gold is too easy to acquire at the highest levels, items that are useful at all levels can become prohibitively expensive to purchase on the market for lower levels. Low-level players would also become incentivized to simply farm for those items to sell on the market, consequently missing out on the other elements of gameplay. This is seen today within Old School Runescape, where gold has inflated so significantly that one of the best uses of time for a new player is to walk 30 seconds from the Grand Exchange to buy clothes for 200 gold and resell them to lazy high-level players for thousands. Players should be free to choose how to play, but misaligned incentives can severely impact the experience of a game. 

Sufficiently advanced in-game economies can also cause unintended economic consequences and have frequently been the subject of economics papers for their sandbox nature. Currently, there is a period of stagflation (weak growth and persistently high inflation) going on in EVE: Online -- a game with one of the most advanced, player-driven economies in existence. There was a problem of abundance happening within the game; it had turned into a race of “build as much as you can as fast as possible” so smaller groups could never catch up. The developers wanted to reintroduce scarcity into the game, and so simultaneously made materials harder to come by and increased the required materials to build assets. This leads to the unintended but easily theorized effect of stagflation, where the price of assets is rising but earnings are not. Unsurprisingly online player counts have dropped as a result because they’ve decided it was too difficult to earn enough in-game currency to purchase assets. 

EVE Online also has an interesting dynamic when it comes to in-game collectibles that differ from the collectible economies of other games and that of the NFT market. Artificially rare collectible ships without impressive stats aren’t particularly expensive, seemingly blowing the supply-side theory out of the water. Without matching demand, prices simply will not appreciate to the levels they do with real-world comparables like designer brands or limited releases. This is completely counter to rare skins within other games, e.g. knife skins in Counter Strike, or Party Hats in Runescape. 

Gamefi has already seen several significant variations for handling inflation, and the “best” way to do so is yet to be determined. There is an entire spectrum of designs that have seen success so far. On one end, there are Cryptokitties with no limit to the breeding/inflation of assets (saving a few “Exclusive” or “Special Edition” cats), and no token or respective mechanics either. Cryptokitties saw significant success and interest early in its release back in 2017 but after years of asset inflation, they utterly missed any of the NFT excitement in 2021. Further along the spectrum is Axie Infinity with no cap to asset inflation, and a couple of tokens -- one hard-capped and another with infinite supply -- but also with mechanics to artificially slow the inflation rate. Their inflation sinks have led to an explosion in token price and user growth, but it is unclear how their design will fare in the long term. Many of these users are purely economic, and most are within emerging economies playing the game just as an income source, when the profitability slows it is not clear what will happen to demand or users. On an island of its own is Zed Run, with a hard limit to “Genesis” assets which can be bred for inferior types at a capped rate but no limit to how many can be bred, and no token. Zed Run’s Genesis horses have seen significant appreciation in this NFT hype cycle as collectors, breeders, and racers all drove demand to their hard-capped supply.  

Token Design

Inflation is only one lever of a project’s Token Design. Unlike virtually every traditional game, real-world trading is explicitly allowed. This creates an entirely new dynamic with respect to how the in-game currency is designed. When there is real money at stake for users, it is difficult to retroactively change mechanics; there are significant stakeholders and real consequences based on these changes. It is important to get the broad strokes of token design correct. A project should not need to make sweeping changes that alienate large swathes of its user base. 

The use cases for currencies within Gamefi are considerably different from that of traditional games. Now they can be used for user acquisition, retention, and incentive alignment. There are little to no existing examples for how to balance these and see what works. Gamefi projects are being built in white space. Strategies are highly varied and many have already seen early success. However, that only shows innovation in user acquisition, and only time will tell what strategies work to align incentives and drive user retention. 

Multi-token designs will likely be pivotal in driving that success, and they can help allow for some level of flexibility. Both Axie Infinity and Star Atlas are using a multi-token model separating out a governance revenue-accruing token (POLIS/AXS) from an inflationary medium of exchange token (ATLAS/SLP). Doing so allows early users to become stakeholders and decision-makers in the game via the governance token while also allowing for flexibility in the inflationary asset. Game mechanics can be tuned and the price may be impacted, but you do not risk diluting early backers as the medium of exchange is not necessarily meant to be an investment.  

User Acquisition 

A significant part of the token economic design is User Acquisition. Done correctly, a project can generate massive interest, a thriving player base, and a long-term stable economy. Done incorrectly, a project will never take off or, potentially worse, see huge growth and subsequent decline.   
The models for how projects seek to achieve this are already extremely varied and there are already examples for what can work at least in the short term. Axie Infinity has pioneered P2E (Play-to-Earn) as a user acquisition strategy, where users can earn real money by playing the game. This has shown to work in generating press and activity for a game, yet without a game that is legitimately fun to play, users will disappear as the earnings do. Still, they have shown this can be a working model, so it will be exciting to see how other projects take advantage of this new method for acquiring users. It seems P2E is just a temporary stage in a game’s life - sustainably earning a notable income likely will not be permanent. If the game is entertaining to play, it could be enough to onboard users and kickstart a game’s growth. 

Zed Run continues to show up as an outlier example of how different models can still be successful. Zed Run has no tokens. Yet, it has managed to build up a large and active player base. It operates much like a traditional game but is plugged into Ethereum and allows for real-world trading and stakes. It is a perfect example of a game that is uniquely enabled by blockchain tech and how it can be very successful without needing its own native token. Many of the early successes we see in the world of crypto games may come from this model where traditional industry titans build out games that simply weren’t possible before. 


User Acquisition is only the very first step in building a game’s community. Gamefi’s token design can align incentives but also create a real risk in terms of how the community develops. Projects have many different community segments to keep in mind as they design both their token and game mechanics. 

Early players will be the driving force of adoption but a game will still need to be accessible to newcomers as time goes on while simultaneously ensuring not to alienate those early players. Axie Infinity is failing here now. The rising price of assets has been great for the earliest players but now it’s a barrier to entry to begin playing the game - a minimum of $450 invested for a terrible team of Axies. If the team allowed the supply of Axies to inflate faster to accommodate more users, the project would alienate existing players as their investments depreciated.

Purely economic players could easily become the majority of players in a game with a P2E user acquisition strategy. Given P2E cannot last forever, properly balancing economic players with entertainment players will be pivotal. At the end of the day, a game that is genuinely fun and brings in entertainment players should not have any barriers for new entrants to join the community. Failing to enable new entrants will create a ticking clock where virtually all players are there to generate a profit, and they will disappear with their ability to do so.

Given Gamefi games allow for real-world trading, there is an opportunity to capture all market segments, from free-to-play to whales. Zed Run does a good job of this today. Investors/whales can own valuable rare horses as collectibles, and thanks to the separate Race Classes, stable owners can be extremely varied in their level of investment/risk when buying, breeding, and racing horses.

Defi Integrated Economy

What truly separates Gamefi from the world of games before it is permissionless integration. The implications of this are far-reaching, from third-party analytics, to independent UIs for one game, to Defi integrations. The future of MMORPG games will be strange. Imagine needing to use a powerful spaceship against an enemy but being unable to afford to buy one. Today, in EVE: Online, you could rent one from a player, but there’s nothing preventing you from scamming them and stealing the ship beyond reputation risk. If the economy was fully integrated into Defi, it could use all of the financial building blocks already in place. You would be able to pay an insurance premium based on your experience and track record as a pilot, and rent a ship from an open marketplace.

Even without the integrations and with real-money trading banned in EVE: Online, the game’s economy has become incredibly advanced with significant resources and levels of organization coming about in spite of the restraints. Factions took place in wars consisting of over 100,000 players and even destroyed $378,012 in ships and structures in a single battle earlier this year. In Gamefi, there will be opportunities for individuals to become war profiteers from these events and pull the earnings back into the real world. It doesn’t stop there, given the purely digital assets and integration with smart contracts and the rest of Defi, Gamefi will rapidly lead to incredible incentive structures and levels of organization at and potentially beyond even what we see in the real world today.


The potential that comes from integrations with Defi may show a taste of the vision these projects have, but they vary significantly. Not every project wants to become “The Metaverse,” nor do they all even want Defi integration; there are significantly varied visions and executions.

Zed Run, for example, is “just a game.” Zed Run has created a successful game uniquely enabled by crypto and is one of the earliest implementations of Gamefi. However, it is effectively a traditional game with publicly tradable assets - the traits of horses and running of races are off-chain and the results are simply trusted by the community. There is no independent verification of randomness or ability to integrate meaningfully with the rest of Defi. In the true decentralized and censorship-resistant vision of Zed Run, many more integrations and levels of organization would be enabled. There could exist a fractionally-owned DAO stable that automatically participates in races or has assigned “trainers” who enter horses into races as they see fit. Crucially, the Zed Run team should be able to disappear without the game stops. As it stands, just like traditional game servers, races go down regularly and it is clear the team could shut the entire project down either on purpose or even by accident.

Axie Infinity could be considered to exist “further down the stack.” They have a plan for what is effectively an open/semi-open gaming platform. Axie Infinity began as “just a game” similar to Zed Run but has an open SDK under development which will allow the open creation of minigames within the Axie universe, ownable as NFTs on players’ land. This is framed sometimes as a “Metaverse,” but does not really fit the bill. It is an underlying platform with established assets on which more experiences can be developed.

A Metaverse is a bold vision. It will not be easily accomplished and there likely will not be many winners. Considering projects are competing directly with Facebook on this, they should understand that. From an investor’s perspective, it falls squarely in the realm of venture economics, low likelihood of success for most attempts and many unseen obstacles to that success, but incredibly outsized potential returns. There are several projects which strive to become that Metaverse, some of the most notable are Decentraland, The Sandbox, Star Atlas, and Open Era. They see a future where the digital and physical begin to interweave much more intimately. Some lean more towards purely VR and others into AR but all believe digital ownership and experiences will shape the world around us beyond just entertainment. It will be both how and where we spend a significant portion of our time.


Gamefi is much bigger than a single innovation or technology. It will profoundly change how the world experiences entertainment. With so many new primitives now at the hands of developers, the world of gaming and online experiences is about to undergo a massive shift. As with any new innovation, early attempts will find obstacles and speed bumps. But, just as the rest of crypto has innovated and iterated faster than even those of us in the industry can comprehend, so will Gamefi. I’ll see you in the Metaverse.