The Wonderful Use of Tokens in the Web3 Gaming Sector Incentivizing Community Engagement and Enhancing Network EffectsTokens in Web3 Gaming Incentivizing Engagement and Enhancing Network Effects
Author: HIRAYAMA SHO
Translation: Lu Lu
Abstract: This article mainly discusses the application and impact of network effects in Web3 games, pointing out how emerging encrypted game platforms create and utilize network effects through their own tokens and other interconnected projects. It also emphasizes the importance of community power and appropriate incentives in enhancing network effects through stage-specific token incentive strategies.
We collaborated with the research team at Animoca Brands to study network effects in Web3 games. The aim is to propose more specific hypotheses about network effects in Web3 product and build on the close relationship we discovered between products and token economics in our previous articles.
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In general, Web3 products face a structural challenge that limits the realization of network effects. Additionally, it is worth noting that DeFi and Web3 games have different rules in terms of network effects and token economics to support their development.
The Evolution of Blockchain Games Away from Network Effects
Blockchain-based games, also known as GameFi, have only been around for about five years, but they have already achieved various innovations, including the use of NFTs, creating speculative demand through reward redistribution mechanisms, and more sustainable mechanisms.
Due to their user-friendly interfaces and experiences as well as financial incentives, Axie Infinity and STEPN have experienced explosive growth in their user base. However, the sustainability of products that rely solely on speculative demand is problematic. Their subsequent products attempt to eliminate speculation dependence as much as possible to achieve a healthier token economy.
We will not discuss the pros and cons of this change here, but completely eliminating its speculative nature has weakened one of the biggest advantages of GameFi: its connection to the global network through public chains. Speculation does not generate network effects and lacks sustainability, but it has already become a global phenomenon. Additionally, unlike DeFi, most existing games do not have composability, and interactions between people are mainly achieved through game content. Therefore, GameFi is easily seen as a downgraded version of Web2 games.
How can we create a product that can distribute tokens without affecting the user experience, achieve a customer acquisition cost (CAC) that is less than the user’s lifetime value (LTV), and autonomously grow beyond a threshold? The answer is network effects.
Network effects (Nfx) refer to the phenomenon where the value of a product or service increases with the increase in its user base. The more users a product has, the greater its value.
When discussing network effects, it is worth noting that there are various types of network effects, such as physical effects, protocol effects, platform effects, performance effects, etc. For more information, please refer to this article. Different network effects have different characteristics in terms of type, category, and stage. For example, the old-fashioned telephone is an example of benefiting from physical network effects, where users can only call others using the same network. If a person can contact everyone they want to contact through a single network, then having two telephone networks is useless because the value to users of a single telephone network increases directly with its usage. Due to its direct utility, people need physical terminals and lines to use it in their daily lives, resulting in high switching costs, and competitors must provide the same or better utility at 10 times or higher efficiency to replace it.
Using games as an example, as the number of users increases, the time required for matchmaking decreases, and there are more common topics for communication. A virtual society is created in the digital space, and the fun for each user also increases.
What factors promote network effects (Nfx) in Web2 games?
In traditional games, the technology field, and the Web2 era, the main factors that affect network effects (Nfx) include ease of use, quality, brand recognition, critical mass, complementary goods, and switching costs:
- The ease of use and high quality of a product or service naturally attract and retain more users, as these advantages can be spread faster through word of mouth.
- Brand recognition contributes to network effects because users are more inclined to use and discuss products or services from brands they are familiar with and trust. Coca-Cola’s strong brand has contributed to its success because consumers naturally have better awareness and memory of its products, which helps spread them faster.
- Critical mass – a network needs to reach a certain level of active users to be attractive to other potential users, thus forming a positive feedback loop. Once critical mass is reached, the network may grow rapidly and be widely adopted as more users join. For example, social media platforms like Facebook and Twitter are more valuable and interesting to users if enough friends and family are already using them.
- Complementary goods refer to products or services that are used in conjunction with a specific network or platform, making the network more attractive and encouraging users to join or stay. For example, software developers develop applications designed for a specific operating system, adding more value to the system.
- Switching costs refer to the financial or non-financial costs incurred by users when switching from one network to another. This makes users less likely to switch to competing networks, helping to lock them into the network because they become increasingly unwilling to give up tangible and intangible investments in a specific network.
How can Web3 games leverage the advantages of network effects?
Web3 games often have limited budgets and imperfect interfaces and user experiences, so they must make full use of the unique features of public chains to attract users. Therefore, although they belong to the same category, the business models of Web2 games and Web3 games are different.
To explore this direction further, let’s consider a game-specific rollup that supports on-chain games with discrete mechanisms (all digital games are technically discrete, but here we focus on “actually discrete games, such as card games and board games, rather than shooting games and real-time strategy games).
The full-chain game stores all game logic on the blockchain. The reason for processing game logic on the chain is not only because it increases information transparency and platform fairness, but also because storing core components on the chain makes the logic composable and interoperable. Here, we focus on games with discrete mechanisms because the number of on-chain transactions required to represent game behavior is limited and controllable. Additionally, thanks to zk technology, we can now support games like poker that require hiding certain information.
This roll-up solution has built-in features to help game creators, including random number generation, information hiding, performance-based ratings, and visibility of on-chain activities. Once a game has gained a sufficient number of users in a region and formed a network effect, it can increase user numbers by expanding to other regions. It should be noted that in the case of synchronous games, only users in the same time zone will have an impact on the network effect, but there are no geographical restrictions for game creators who benefit from increasing user numbers.
Game developers, livestreamers, and tournament organizers receive native tokens from roll-up based on their performance. They should be incentivized for their contributions to the network effect, not just for playing games.
The importance of integrating various network effects into products
The main reason why Web3 projects, especially non-DeFi applications, cannot achieve scalability or self-sustainability (or both) lies in their products. Many people focus on sustainable token economic models, but what really matters is the product itself. While Web3 games can achieve most of the functionality of Web2 games, they are largely “nerfed” due to significant budget differences, limitations in user interfaces and experiences, and unreasonable designs for token integration.
nerf = weaken (usually used for balancing games)
Many Web3 games lack network effects or only have the convergence network effect shown in the green line in the diagram. This effect initially leads to noticeable utility growth but quickly weakens to a certain value. For example, increasing the number of users in a region can reduce the time required for matchmaking. The utility growth from 10 seconds to 1 second is significant, but reducing it from 1 second to 0.1 second does not result in a substantial increase in utility. The value of a product depends on the upper limit of its utility.
On the other hand, the blue line represents the network effects formed by geographically scalable products, token standards, and comprehensive ecosystems that include multiple games, as well as the tools for building on-chain game logic and the new type of wallet that provides a seamless user experience. These measures may not bring explosive growth in the short term but will have a compounding effect.
By integrating multiple network effects into a single product, initial launch and long-term growth can be achieved. For example, industry-specific rollup operators for the above-mentioned game initially had to create their own games and organize competitions. However, as the number of users grows, a community will form where not only the waiting time for games decreases, but more users are also willing to replace the operators to create games and organize competitions.
Case of network effects in Web3 games
The magical power of $MAGIC in the TreasureDAO ecosystem
Current Web3 games find it difficult to leverage network effects through their platforms, and popular games such as Axie Infinity and STEPN have limited exposure to network effects. However, the situation is changing as encrypted gaming platforms shift towards creating multiple gateways and targeting multiple player groups with a single token.
TreasureDAO is a good example, where their $MAGIC token allows users to participate in some metaverse projects in the decentralized ecosystem on Arbitrum. As different projects on the platform utilize and are financially connected to $MAGIC, each game serves as a complementary product that adds value to the TreasureDAO ecosystem, and network effects can be observed.
TreasureDAO takes a bottom-up approach to create the metaverse by providing users with free game assets to help build the community and attract more players, ultimately reaching the desired critical mass. Developers also pay great attention to cultural development while developing games.
Artists and developers can fully utilize community resources, while players enjoy an enhanced gaming experience. $MAGIC’s design also connects players from different games to the same community, and players can exchange assets between different games using $MAGIC, which has a powerful network effect in terms of interoperability. In addition, the enhanced metaverse experience attracts more users, which leads to more developers and better experiences, and so on. Over time, this cycle contributes to the development of the entire ecosystem.
The $MAGIC ecosystem protocol includes: Bridgeworld, Smolverse, Tales of Elleria, The Beacon, Battlefly, The lost donkey, Toadstool, Knights of the Ether, LifeVerse, Lost Samurise, and Realm.
As shown in the above figure, the TreasureDAO ecosystem demonstrates good potential in the aspect of “one token, multiple games” structure. However, the influx of new game users brought by DAU (daily active users) is only enough to offset the decrease in old game users, which cannot guarantee self-growth. This means that the ecosystem has not fully achieved self-sustainable development.
Animoca Brands leverages its own network effects by connecting numerous projects in its portfolio through shared liquidity pools and cross-project token rewards. Among them, the first NFT series supported by Animoca Brands, “Mocaverse,” demonstrates this synergistic effect by integrating multiple communities from other projects and subsidiaries in the Animoca ecosystem, enhancing its value.
In addition to the examples mentioned above, network effects can also be seen in the EVM economic model area and tools, such as programming languages, development toolkits, node services, token standards, token issuance and tools, etc. Creating a new EVM chain will form a decentralized interconnected interoperable ecosystem, which will generate a series of positive effects, such as multi-chain deployment of products, utilizing infrastructure on other chains, and increasing potential customers for developers on different chains.
Unlike EVM-compatible Layer 1 implementations for horizontal scaling, EVM-compatible Layer 2 based on roll-up is for vertical scaling. Although the economic model at the protocol level is different, it is equally effective for application layers such as games. In addition, since each chain and roll-up have strong influence in specific regions and different user perspectives, the same strategy of extending atomic networks to other regions can be used to enhance network effects, similar to how Uber expands its services.
Envisioning the Future Token Economic Model
Token incentives for specific stages or goals
With the influx of DeFi and GameFi products into the market, management teams need to find opportunities to build user communities in order to benefit from the gradually growing network effects. One common approach is to adopt phased token incentive measures to attract the participation of initial user communities.
In these incentive schemes, maintaining a proper balance is crucial to fully stimulate the enthusiasm of early users until the product matures to a stage where it can attract a wider audience. During this period, token incentives should be carefully managed to avoid issues related to unsustainable economic models.
Although there may be different views held by many, certain product categories do not necessarily require excessive decentralization, and token design should not be immutable. For example, a fixed token issuance plan means that management teams cannot change their strategies based on constantly changing environments. In contrast to some emerging DeFi products, these products attract users by allocating a fixed budget as token incentives in the initial stage, requiring payment of fees or purchase of items as conditions for obtaining tokens, and then transferring the funds received to the treasury.
For gaming platforms, which offer a wider range of practical tools compared to DeFi, it is necessary to adjust the token incentive mechanism according to the platform’s development. Initially, gameplay and community collaboration can be incentivized through liquidity token rewards. As the platform grows, it becomes crucial to adjust these rewards to maintain a stable ecosystem.
By seeking alternative strategies in the later stages of the game’s lifecycle, managers can encourage participation in competitions, innovative game development, and intense leaderboard competitions through different scales of token rewards (or not relying entirely on token-based rewards).
Evolution of network effects from small-scale to large-scale
As the title suggests, developing a strategy is necessary to leverage more small-scale network effects. For example, once Uber has a certain number of drivers in a city, the additional benefits of adding more drivers become minimal. Therefore, it is important to understand how to expand the network first to achieve small-scale network effects, and then use several small-scale network effects to facilitate larger-scale network effects, thus ensuring the sustainable development of the project.
We have seen this trend in the horizontal expansion model of multiple small networks (such as Uber and Tinder) and the vertical expansion model of individual large networks (such as telephony and identity verification).
This trend is also evident in the GameFi field, as demonstrated by approaches taken by Axie Infinity and STEPN, where progressive network effects are driven by customized tokens for each game. In contrast, TreasureDAO utilizes small-scale networks within the platform to promote the expansion of the token ($MAGIC) ecosystem within the platform.
For the cryptocurrency industry, there is another alternative method to stimulate early network effects, which exists within its community. When companies expand the main player base of a game through token incentives, a blueprint emerges, allowing GameFi enterprises to leverage existing communities and gradually expand from small-scale to large-scale. This provides a new path for GameFi companies to quickly accumulate network effect advantages and ultimately expand their products.
This has been well demonstrated in the upcoming Legends of Mara game by Yuga Labs, where they use the Otherside series of NFTs in the game. Previously, Yuga Labs had gained strong support from the community through the Bored Ape Yacht Club and subsequent series, and they leveraged this to drive the establishment of a user base for Legends of Mara in its early stages and ultimately expand its influence through network effects.
Therefore, to create a successful product, we must consider what scale of network effects to achieve. For the sustainable development of the product, governance and token issuance must be flexible and different from the old model of immutable token design.
There is no doubt that Web3 games have tremendous potential. However, managers must fully leverage network effects to achieve efficient growth, while not neglecting the importance of sustainable token economics for long-term success. The success of existing Web2 projects and how they cleverly leverage network effects to scale operations provide valuable experience and lessons. With the continuous development of GameFi, if executed correctly, it will provide substantial benefits for users.
Therefore, for product owners, designing games based on a strong community and appropriate incentives is crucial to achieve exceptional expansion through network effects.
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