You Can’t Eat Software

How to build sustainable play-to-earn game economies

Every kid’s dream in the ‘80s — at least mine — was to play video games as a job. Streamers made it possible for the best entertainers to achieve my dream, but the emergence of play-to-earn games will make playing video games will be the most common job in the next couple of decades. 

Axie Infinity already makes it possible for gaming to be a good job in emerging markets. Players in the Phillipines can earn more than 10x minimum wage, north of $50 per day. As play-to-earn games evolve into true economies, they could create viable jobs in developed markets. Today, there are 10 million people in the US that work in retail, cashier, and fast-food jobs. A lot of those workers would rather game for money, especially if they could earn more than their current jobs. 

Play-to-earn economies allocate and distribute scarce resources between the real and digital world. This creates a curiosity: Digital resources are limited by artificial scarcity, while real-world resources have very real constraints. Software is capable of cheap and infinite reproduction unless instructed otherwise. Apples are not. Cheap and infinite reproduction enables software to eat the world. 

But humans can’t eat software. 

We have an LP and mentor that often reminds us, “You can’t eat TVPI.” TVPI is the mark-to-market value of an illiquid portfolio of assets, in our case a venture portfolio. On paper, the assets are worth some value hopefully higher than we paid for them, but we couldn’t go into the open market and get our book value for the assets. Private equity assets are illiquid and would sell at a discount, if at all. Cash returns buy food, not TVPI.

Nor do game assets buy food. Those assets need to be converted to cash to buy food. 

Herein lies the great challenge and opportunity for ambitious game economies: Creating a system that sustainably attracts enough real-world resources to support a living for the natives that rely on the game. 

Natives and Tourists

Let’s start with a thought experiment. I’m assuming you have basic knowledge of Axie Infinity for this article. If not, you can read more here. Imagine a world where people who play Axie for income are the only ones who play the game. Axie is their only way to make money. The game economy would collapse in time.

Whatever initial resources (cash) players bring into the economy to buy game assets might get traded around, but as players convert game assets back to cash to eat, the cash value of the game assets would go to zero. Since all players are relying on the game for income, it’s impossible for new real resources to enter the economy. Game assets would destined for zero regardless of any creative tokenomics that might reduce the supply of assets in the face of lower demand. 

Our thought experiment reveals two axioms for any game attempting to create a sustainable economy: 

  1. Natives need the ability to take real money out of the system without an economic collapse, so they can live in the real world.

  2. Real money must come into the game economy from tourists who spend as a luxury with no intent of cashing back out. 

Natives are those who rely on the game economy for income to live. Tourists are those who earn income in the real world and bring resources into the game economy for recreation. Whereas luxuries are expendable in the real world, they are critical in creating digital economies.

Considering natives and tourists through the Maslow lens grants us a contrarian insight: Tourists are more important than natives in developing play-to-earn games. It’s clear what natives want. They want to be able to draw resources out of the game for food, shelter, and security. Things like gameplay matter to them less than earning potential. 

Tourists are looking for something more abstract than basic needs. They want something that might involve community, entertainment, status, recognition, or some sort of challenge to improve. Building mechanisms to engage tourists on these levels so they keep bringing resources into the game is critical to a sustainable economy.  

The Native/Tourist Flywheel

The native/tourist dynamic has the makings of a two-sided marketplace where more buyers mean more spending, more spending attracts more sellers who contribute more inventory, and more inventory drives more buyers and buying. That’s a direct network effect — more participants in the system make the system more valuable in aggregate. 

NFX explains and visualizes this beautifully: 

While the benefit of tourists to natives is clear in the marketplace, the benefit of natives to tourists is less clear. 

There are two ways a game economy can build a flywheel of value between natives and tourists: 

  1. Harvesting. The game rewards players with tokens or other assets for playing the game that can be sold for cash. Natives farm assets through game play to sell to tourists. 

  2. Creation. The game allows players to create assets or even offer services that can be traded for cash. Natives are rewarded for their individual creativity and quality of product rather than grinding time. 

The harvesting model has proven effective and seems to be the favored model for early play-to-earn games. It’s a natural extension of mechanics in mainstream, non play-to-earn games like World of Warcraft and NBA 2K. The difference is that play-to-earn games make it easy to trade game assets, while Warcraft and 2K don’t. Mainstream developers often eschew true marketplaces for in-game assets because they think it will encourage players to spend more on game currencies. Assets for these types of games are traded on gray markets that function as more limited two-sided marketplaces.  

The challenge with harvesting-based game economies is that they’re boring for natives and don’t add need constant updating to keep tourists. No native is going to reach the upper levels of Maslow by farming items in a game. All farming job are the same. As tourists complete collections and status wanes with broader interest in the game, developers need to create updates that keep tourists engaged. If natives grow faster than tourist dollars, then the economy will eventually suffer declining native incomes as resources disperse over a larger pool. 

Play-to-earn developers that use harvesting as their economic basis must expend significant resources to keep their economies viable. Warcraft offers expansion packs every couple of years with new items and experiences. NBA 2K offers a new game every season. This creates a centralized failure point for the economy. If the developer can’t create compelling content, the economy will suffer from fewer tourists. 

Now, imagine a game economy where natives have creative freedom to edit and alter the game, keeping it fresh for tourists. Maybe the native creates tools or items that are usable in the game itself. Maybe the native builds alternative experiences that change every time. Maybe the native entertains by putting on shows in the game world. This is the creation-based economy. 

When natives are free to exercise creativity as an intended function of the game, the value to tourists becomes stronger as their desires overlap in Maslow’s hierarchy. Both natives and tourists can explore community, esteem, and actualization at the same time in a creation-based economy with natives earning money for it and tourists paying. By decentralizing control over the tourist experience, you optimize the same for natives. 

Roblox is a sort of creation economy where developers create experiences within the game and earn in-game currency that can be exchanged for fiat. The company paid developers over $300 million last year. Roblox maintains the game world, but lets developers make it entertaining. 

An even more unique creation economy, although money is not directly involved, is the GTA role playing community. If you go on Twitch right now, you’ll probably find at least a hundred thousand people watching GTA V, an eight-year-old game. It’s because of a strong role play community that acts out characters in the game, from judges to police to miscreants. They make the world real, and they get paid in-game currency for their jobs. A crypto version of the in-game currency could easily tie to fiat. 

If Rockstar embraced the role play community and built it into a world for tourists to visit, it would be like a virtual Westworld. Tourists could play along with role players instead of just watch streams. The more involved in the game, the more tourists will be willing to pay, opening new ways for natives to monetize. 

The creator economy that has formed around GTA feels like the thing closest to final form in play-to-earn, and it’s just beginning. 

Uncomfortable Profit

"Nothing that deeply matters in business is new."

-       Gary Hoover, creator of Hoover’s database

Nothing that deeply matters in human nature is new either. Many people perform jobs in the real world that only serve the bottom of Maslow’s hierarchy. That’s survival. Game economy jobs built around harvesting will live in the same space. There’s nothing wrong with in-game farming jobs, but they aren’t some incredible freedom from unfulfilling work. 

People who figure out how to make a living at the top end of Maslow earn more economically and spiritually. Play-to-earn developers need to find ways to enable those kinds of jobs to create truly compelling economies with players that are as addicted to the game world as they are to the real world. Maybe Axie or GTA figure out how to build a system that maximizes value for both natives and tourists. Maybe the dominant game economies of the future that provide employment for millions around the world don’t exist yet. 

The opportunity for profit is to be early to the game economies that do figure out how to create sustained tourism through compelling work for natives. The assets in games that figure out that equation — land, items, currency, etc. — will be a great investment because they will be backed by a steady flow of real resources. Resources we can eat, not just bits of code.