Constructing the Ideal P2E Economy


Warren Buffet says “ When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it’s typically the reputation of the business that stays intact”.

As the world propels headfirst into the Web 3 wormhole and millions of dollars are invested in P2E gaming start-ups, it is imperative to start talking about the economic realities of these businesses. If this is the democratic, decentralised future we have all been waiting for, then we wanted to ride the economic gravy train. In order to really understand the inner workings and sustainability of P2E games, in this blog we draw the analogy of these economies to real-life macroeconomics to demystify topics like deflation, currency sinks, money supply, and more.

We pull out our dusty economic books and deconstruct the economics of Web 3 game economies by talking about the following in this piece:

  1. Introduction to traditional web 2 game economies
  2. Video games and macro-economics
  3. Similarities between P2E economies and real-world economies
  4. The Axie Infinity economic problem
  5. Key challenges in designing P2E economies
  6. How P2E economies can be managed and what an ideal economy looks like

Traditional (Web2) Game Economies

The ideal game economy challenges, excites, and fulfills. It keeps bringing players back for more, without being punitive to non-spenders. The economy, in many ways, is the backbone of the game. In web2 (Free to Play i.e. F2P and Games-as-a-Service), the economy is a key driver of revenue and engagement. We lay down some key characteristics of successful web2 game economies:

  1. Balancing Soft and Premium Currencies

Virtual currencies form the key unit of exchange in these economies. There are two primary types (a) soft, and (b) premium. Soft currency (such as gold, coins) is earned primarily through gameplay and can theoretically be spent on a wide range of products and experiences in-game. However, to prevent in-game inflation, mechanisms are put in place such that users need to amass large amounts of this currency to be able to make certain purchases or interact with premium items. Premium currency is primarily purchased using fiat. Their usage in most games is limited to the purchase of gacha-based products or exclusive items. Allowing premium currency for a wide array of purchases in a PvP (player vs player) runs the risk of turning the game into a pay-to-win style of game - which can be frustrating for skillful non-spenders, thus, best avoided in quality games.

2. Managing Sources and Sinks

As opposed to web3 economies, sources (avenues to create or earn in-game currencies) and sinks (avenues to use or burn in-game currencies) in web2 games are very straightforward. Players earn soft currency through objective-based rewards such as daily missions, streaks, rewarded ads, etc. Premium currency can only be purchased or is given out as a rare bonus every now and then to keep a player motivated. For a player, purchasable items are a focal point of the economy. Grinding for soft currency or purchasing premium currency will only happen if there are compelling items to buy in-game. A large part of the economy management is to ensure sources do not exceed sinks. This is to prevent a situation where players end up with more than enough in-game resources, the biggest consequence of which is reduced in-app purchases.

3. Encouraging In-game Marketplaces and Auction Houses

Great examples of this include Runescape’s Grand Exchange, FIFA Ultimate Team’s Transfer Market, and World of Warcraft’s Auction House. In-game marketplaces allow players to sell or trade in-game items and are primary drivers of network effects in video games that have this functionality. Over time, players do demonstrate speculative motives to trade in-game assets. This manifested in the so-called “Gold Rush”, where players in MMORPGs such as World of Warcraft paid foreign workers to grind soft currencies. Further innovations included third-party marketplaces for in-game items such as DMarket for DOTA. However, a flourishing game can captivate many a user by encouraging a thriving, open, free marketplace for in-game assets.

Web 2 game economies with known levers and mechanics are less of a mystery (in comparison to Web3 game economies) but still, building a compelling game economy with depth without impacting retention or engagement is no small feat. In fact, it is often key to separating the great from the mediocre.

However, under the guise of entertainment, video games - especially the ones with full-fledged virtual economies, serve as fertile ground for economic research.

Video Games & Macro-Economics

As Yanis Varoufakis, ex-Finance Minister of Greece and Economist-in-Residence at Valve puts it, “economists can play God in virtual worlds and alter parameters (such as price, quantities, etc) that they cannot in the real world”.

Furthermore, virtual economies also provide real-time data. This has led to a host of academic studies done on in-game economies and how they behave.

Perhaps, the most interesting study comes from Professor Edward Castranova. In 2017, Castranova and his colleagues conducted a 575,000 subject, 28-day study on the behaviour of virtual economics in the football management game Top11.

In it, Castranova outlines a model (see below) of how a traditional in-game money market in a F2P economy works; and how this is different from the real world.

Virtual Currency Market (Source: Edward Castranova et al, 2017)

As opposed to a real-life money market, where the money supply is a vertical line (representing a fixed actual supply of liquidity managed by a central monetary authority), virtual economies are represented using a horizontal money supply line which represents a static price for any given quantum of a virtual currency. Money demand here represents the demand for virtual currency from players to purchase in-game items.

In this context, the developer/publisher in a F2P game has the following levers to control the economy:

  1. Changing the real-world price of virtual currency (represented by an shift in the money supply curve)
  2. Virtual currency endowments, i.e, giving quantum of virtual currency for free to users (represented by a shift in the money demand curve)
  3. Management of sources and sinks (represented by a shift in both supply and demand curves)

As the behaviour of the in-game economy is directly linked to engagement and revenues, developers and publishers largely use the aforementioned principles to ensure a healthy, sustainable virtual economy.

While Web 2 game economies differ from the real world, we believe that P2E game economies, in order to be successful, have to emulate and understand real world economics.

The next few sections will explain why. Read on.

P2E In-game Economies

P2E game economies are, for all intents and purposes, synthetic and simplified versions of sovereign nation states. Therefore, the way these economies function and grow, bears resemblance to the efforts of national treasuries (fiscal policy), central banks (monetary policy), and exchange rate policy. As such, one can draw some very interesting parallels between a game such as Axie Infinity and a real nation-state.

Thus, for simplification of economic concepts, we take the liberty of making some broad analogies.

We believe that Web3 games and P2E models need to apply traditional macroeconomic thinking for sustainable functioning.

In the real world, flourishing, export-led economies are characterised by a significant trade surplus (exports > imports) and a net inflow of currency from other markets. This net inflow of capital puts upward pressure on the domestic currency, increasing the purchasing power of citizens with regard to foreign goods while putting deflationary pressure on local prices. In such circumstances, however, the economy remains vulnerable to changes in foreign demand. In this context, the job of monetary policy is to balance inflationary and deflationary pressures, and that of fiscal policy is to redirect investments towards sustainable economic growth.

Fiscal policy is altered by the level of government spending, level of taxation, and level/form of govt. borrowing. Fiscal policy is expansionary during downturns and contractionary during upturns in the economy.

Monetary policy needs to balance inflationary and deflationary pressures by altering interest rates. If demand pressures are building up in the economy, reflected in rising prices, the central bank authority can tighten monetary policy, thereby dampening demand. Conversely, in the face of weak demand, reflected in deflationary pressures, the central bank can loosen monetary policy to support economic activity.

Exchange rate policy is concerned with how the value of the domestic currency, relative to other currencies, is determined.

In a P2E context, fiscal policy could be analogous to token endowments, governance practices, energy mechanisms, etc. Monetary policy in a P2E world is the usage of minting and burning mechanisms by developers to control the quantity/supply of the token. An exchange rate mechanism in a P2E context involves managing the rate of exchange between the game token and other currencies such as ETH or fiat.

As a result, P2E economies have money markets that are constructed and behave like real-life, open money markets (see diagram below). Money supply represents the amount of liquidity (read: tokens) in the system, which in initially set by the central banker (e.g. the P2E game developer) and hence has a finite supply at a given point of time. Supply can be theoretically uncapped if token economics permit.

Any leftwards or rightwards shift in the money supply, results in changes in interest rate (i.e. how attractive and expensive it is to participate in the game). Money supply in a P2E economy constantly shifts through various minting (which refers to the creation of the in-game token administered/controlled by P2E developer) and burning (which refers to the extinguishing of the in-game token through player usage) mechanisms by market participants.

For example, as we’ll explore with Axie Infinity in coming sections, if minting> burning, the money supply shifts rightward. This reduces interest rates, which we assume is a proxy for the attractiveness of the economy, while also putting inflationary pressure on the token. Hence, the central bankers, i.e developers/publishers have to use the various mechanisms available to them to manage the supply of money.

P2E (and real-world) Money Market (Source: Edward Castranova et al, 2017)

Current Construct of P2E Economies and The Axie Infinity Case

Where most P2E games depart from existing nation-states, is the use of dual-tokens (currencies) — though games that use a single-token or a three-token system also exist. The rationale proposed by developers is that diversity in tokens reduces supply and demand pressure on a single token and hedges the publisher against token volatility. There are two major categories:

(a) A utility token — this is used to interact with and perform in-game tasks, and is the main reward type. This type of token can have uncapped supply theoretically but quantity is usually fixed at a given point in time via minting by the developer and needs the most amount of management.

(b) A governance token — this is a digital governance token that represents future ownership in the game and has a fixed supply. It is offered as a reward for interacting with the game in certain ways and is introduced over a long unlock period. For the most part, these tokens are held in the community treasury.

Given the differences, both tokens require very different kinds of management. The utility token supply is controlled primarily through minting (much like printing of currency) and burning mechanisms. Whereas governance tokens, with their limited supply and governance rights, are earned and spent by players, and are held in a community treasury for future unlocks. A publisher does seemingly have a lot more control over the governance tokens as compared to utility tokens. This structure differs from the traditional web2 system of earned currency and paid currency in that both types of tokens can be a) traded, bought, and sold, b) earned as rewards, and c) can be used to interact with actual gameplay.

As an example, we look at Axie Infinity, which has a dual token structure. At its core, Axie Infinity is a turn-based RPG. Players start off by playing the Player vs Environment (PvE) adventure mode and participating in daily quests. As they progress, they get involved in the Player vs Player (PvP) arena mode and Axie Breeding (i.e breeding two axies to mint a new one). The core loop is tied into a dual-token economy consisting of the utility token Smooth Love Potion (SLP) and Axie Infinity Shard (AXS). The game also has an energy system to prevent excessive grinding. The figure below paints a succinct picture of how the Axie Ecosystem functions:

Axie Infinity Ecosystem (Source: Axie Pulse)

Thus, if we are extend the export-led, nation-state analogy, it is not dissimilar to how the economy in a game like Axie Infinity works. Safe to assume that the goods that are exported are the NFTs i.e. Axies, the domestic currency is SLP (Smooth Love Potion-Axie’s utility token), and the net inflow of capital refers to ETH (and by extension, fiat). Due to strong demand for its goods (the Axies) Axie Infinity is a net importer of ETH (or fiat, which can be used to purchase tokens to start playing the game). This puts significant upwards pressure on SLP, and it’s the job of the developers to manage this in order to keep the economy from falling apart, much like a central bank.

Inflationary pressure on SLP has a relatively deflationary effect on the economy — reducing the incentive to participate in the ecosystem and create value (i.e Axies). With appreciating SLP, it becomes more convenient for Axie players to cash out SLPs and purchase Axies outside the ecosystem, rather than produce them in-game. This is detrimental in the long run as it reduces earning potential, and therefore engagement in the game.

The manner in which SLP inflation has transpired has brought to light the importance of macroeconomics 101 in P2E games.

In recent times, a major problem with Axie Infinity economy has been SLP inflation. If we look at relative minting and burning (see chart below):

SLP Burn vs Mint Chart (Source: Axie World)

Some key observations emerge:

  1. The minting and burning rates decoupled somewhere in May 2021, and the decoupling increased at an increasing rate.
  2. Minting shot through the roof, relative to burning, towards the end of 2021. Suggesting that players generated more SLP than usual. Axie faced an SLP oversupply problem, especially post-September 2021.
  3. Without adequate burning mechanisms in place, excessive supply meant volatile pressures on SLP prices (see chart below).
SLP Historical Prices (Source: CoinGecko)

Analysis by Naavik points out that SLP inflation was driven by a couple of structural and in-game reasons:

  1. If the only way players could procure SLP was to play the game, the inflation would have most likely stayed in check. However, a secondary marketplace emerged where users could trade SLP for USD, which now allowed the SLP to be taken out of the economy. This is akin to exchange rates in the real world and makes the currency vulnerable to a sell-off. The secondary marketplace also meant that scholars (acting on behalf of gaming guilds), who played the game as a means of earning a daily wage, could cash out at their SLP for USD at the end of the day. Crucially, here an SLP cashed out of the economy is an SLP that is not burnt. This further exacerbated the minting and burning discrepancy.
  2. The observations also point towards suppressing network effects in the game as one would expect various participants to trade in-game and hence keep the economy balanced.

Modern real-world economies deal with the aforementioned scenario through a mechanism called “Sterilization” through which inflationary (and deflationary) scenarios are prevented by adjusting the domestic money supply. In the real world, in an export-led, surplus economy the central bank deliberately reduces the amount of domestic currency in the system (either by reducing credit or selling securities in the open market).

The way Sky Mavis dealt with SLP token inflation is not too dissimilar. As hypothesised, Sky Mavis had to act like a nation-state and leverage monetary policy to manage SLP token inflation. In January 2021, Sky Mavis released a dev report stating the need for economic balancing in the game. Here, they acknowledged that SLP creation has been outpacing its use, with daily minting volumes at 4x that of burning volumes. With Season 20, Axie introduced measures to curb SLP supply, which included the following:

  1. Balancing in-game rewards by deprecating SLP rewards for certain interactions such as daily quests (Monetary measure)
  2. Changing ratios of in-game incentives by providing AXS as a reward (Fiscal measure)
  3. Measures to prevent SLP production through hacking and botting techniques (Fiscal measure)
  4. Offering SLP buybacks for a limited period of time (Monetary measure)

At the same time, token sinks such as cosmetic upgrades, axie body parts, and buy-in tournaments were also introduced.

It is interesting to note that majority of the “policy” changes that were brought about in Axie Infinity were supply-based, rather than burn-based. This is primarily because one cannot reliably predict user behavior, and hence cannot use it to control monetary supply. This is largely true for modern nation-state economies as well.

The chart below is a succinct representation of the deflationary and inflationary forces at play in current P2E economies, and how monetary policy learnings can be used to keep them in check.

Networks in P2E Economies (Source: Economics Design and Lemniscap)

Thus, if perhaps Keynesian economics were applied to modern-day P2E economies, much of the instability and volatility of these games would be far better managed.

However, there are inherent design limitations today that prohibit the application of basic economics in P2E games.

P2E economy design challenges

  1. Fallacy of composition

The Fallacy of Composition is a term coined by famed economist John Maynard Keynes and describes the tendency to extrapolate what is good for the individual to what is good for the macroeconomy. For example, if an individual is finding it hard to make ends meet, it makes sense for him/her to tighten their spending. The same can’t be extrapolated to a larger group or economy- a government cannot afford to curb spending in recessionary periods.

This fallacy can be seen at play in Axie Infinity, for example. In order to cater to guilds and scholars earning daily wages and the promise of Universal Basic Income, the in-game economy ended up in peril. Developers and designers of web3 games might have to consider this fallacy closely as they design and iterate economies for their games. Balancing individual player motivations with larger monetary implications is key to a sustainable P2E economy.

2. Price of participation

Unlike most web2 games, web3 games have a price of participation. Whereas F2P democratized access to video games and introduced several touchpoints for the closeted gamer in all of us, P2E operates on a different tangent. P2E requires a significant upfront investment (through buying tokens or in-game NFTs) from a user i.e. the price of participation. Furthermore, in P2E the token prices change by the second, leading to volatility in the price of participation.

A prohibitively high price of participation runs the risk of crowding out a significant customer base. This is where learnings from real-world exchange rate management become pertinent to P2E developers, i.e, they need to manage the rate of exchange between their in-game token and other currencies to provide users an incentive to participate within the in-game economy.

3. Maintaining minting and burning equilibrium

As was outlined in the Axie Infinity example, publishers have to be astute and decisive in managing the minting and burning mechanisms for their in-game tokens. This becomes especially pertinent in a situation where tokens can be taken out of the economy and traded for other assets. User behaviour leading to deflationary environments is only just being discovered, and developers are currently being reactive to manage their digital nations.

4. Managing net capital outflow

Token appreciation may seem like a good outcome on paper, but it can have detrimental long-run effects. Just like you would see in actual economies, appreciation of local currency (in-game token) leads to increases in purchasing power of foreign goods (other tokens, NFTs outside the ecosystem, etc) over domestic goods (e.g. in-game assets) which in turn increases net capital outflow. This takes engagement away from the game. Again, this is where the role of the developer is to act as a central bank to manage the token supply.

5. Centralized-decentralization

Lastly, but most importantly, is that P2E models will end up in a place of Centralized Decentralization. As pointed out in this piece, P2E economies by their very nature, need to be managed by some knowledgeable central authority. This is, and will be, necessary to ensure the health of the in-game economy — leading eventually to sustainable engagement and revenues.

Guidelines for a sustainable P2E economy

While we can break down the current state of P2E economies, we acknowledge that it is still early days. Many in-game phenomena and behaviors are being discovered, or are yet to be discovered. However, as developers build P2E titles, there are certain guidelines that could serve as possible solutions to a sustainable economy:

  1. Making a fun game: Just like how a real-world economy stays healthy by providing value to its citizens and market participants, a P2E game has to be fun and offer players entertainment. This makes sure that players are okay with spending money in-game, without expectation of cash return. Further, this increases the propensity for players to keep their wealth in-game, thereby reducing outward financial flows.
  2. Proactive monetary policy: Phenomena from early P2E economics have highlighted the importance of proactive monetary policy, undertaken by an informed central authority. The very open nature of P2E economies means that developers will be required to keep constant tabs on minting and burning rates — and make required adjustments to balance the economy from time to time.
  3. Hiring in-game economists: As P2E publishers realize the crucial need for active management of their virtual economies, the need for a dedicated, in-house game economist will become evident. Many traditional gaming companies with massive virtual economies have already brought in resources to help out such as Valve, Manticore Games, etc. We believe that founding teams building in this space will require an amalgamation of three core skillsets, (i) game design and development experience, (ii) blockchain and tokenomics expertise, and (iii) real-world macroeconomists.


Web3 has tremendous disruptive potential in across a multitude of use cases, but early implementations in gaming have been met with a healthy degree of skepticism. It is imperative that as P2E companies raise enormous sums of capital, with the promise of providing economic value creation, they also embrace their responsibility of providing economic stability to those very players.

Else, their reputations of being companies with bad economics or worst, Ponzi schemes, fads, and scams will continue to endure.

If you’re building a sustainable web3 gaming startup we’d love to hear from you!




India’s gaming & interactive media venture fund. Early stage is where the magic happens! Contact:

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India’s gaming & interactive media venture fund. Early stage is where the magic happens! Contact:

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