Here are the similarities between P2E Gaming and Ponzi Schemes

“I think there are two pieces here. The first point to consider is kind of the mechanics of the game itself and how these mechanics have kind of developed into Ponzi schemes. We can argue whether or not this was the original intention, but it seems like these days, the developer of the games kind of, in hush tones, admit to it. 

“Then the other aspect of this is just how this is kind of a microcosm of web3 being that a lot of these games report to be decentralised and it looks that way being that the in-game tokens are NFTs which you can trade and own. But, when you look at the actual implication on the users, it’s still very centralised because the game can for example, ultimately block one of these tokens,” Paul Butler, a startup founder and software consultant, argued, while discussing on CBNC why he believes play-to-earn gaming looks similar to Ponzi schemes and how these games affect the real-world economy.

Blockchain technology became widely known mainly due to the rise of fungible tokens, commonly known as cryptocurrencies like Bitcoin and Ethereum, which have been on the lips of everyone, especially since 2021. A newer token standard called a non-fungible token (NFT) has helped show new applications of blockchain technology outside of the everyday use cases we have seen so far, like Decentralised Finance (DeFi).

NFTs, though known by many to be funky looking digital JPEGs on the Blockchain, have been able to redefine property rights around digital assets by offering an exciting way to monetise creative content in the world of digital art and collectibles. 2021 is labelled the NFT boom year as there was a growing adoption of NFTs in the digital art space and gaming.

Data from The Block reveals that total Non-Fungible Token (NFT) trading volume ended the year 2021 with a total of $8.8 billion, with arts and collectibles accounting for 59% of the volume, while gaming NFTs accounted for 41% of the trading volume. 

According to The Block, “As the year progressed, so did the interest surrounding NFTs and blockchain gaming, with its number of deals more than doubling from Q1 to Q2, to it being the most popular deal type for the past four consecutive months. With one month remaining in Q4, there have already been more NFTs/Gaming deals in Q4 than Q3 (103 to 137), and in both October and November, roughly 42% of all deals that occurred were in firms that cater to non-fungible tokens or gaming.”

What then brought interest to the P2E and blockchain gaming sector?

The Problem with Traditional Gaming

The introduction of NFTs to video games intended to create a more equitable game economy, that allows players real ownership of their in-game assets and offer them meaningful rewards for their participation. This is a thing traditional gaming has failed to address. 

A small select group of professional gamers earn money through sponsorships, streaming, and competitions in the traditional gaming ecosystems. For example, a popular online gamer, going by the alias Ninja, is the richest pro gamer with an estimated net worth of $40 million. He is one of few elite players who benefit from traditional gaming models winning prizes and signing contracts with big brands. 

Ninja’s success is rare as the majority of gamers still spend money purchasing in-game assets and enhancements, without return.

Read also: FCCPC’s Babatunde Irukera orders loan sharks to desist from compounding interests

Axie Infinity – A Case Study

Axie Infinity was the pioneer in the P2E space in 2021. According to The Block, Axie Infinity led the entire NFT space in terms of weekly volumes. The report also revealed that with $3.2 billion worth of lifetime transactions, Axie almost doubled the total secondary sales of CryptoPunks, which holds second place with $1.6 billion worth of lifetime transactions.

Asides from secondary sales, Axie led in terms of owners, with approximately 2.6 million people owning its NFT and over a million buyers. Axie was one of the leaders in total transaction counts with 9.3 million approximately, with the NBA Top Shot collection taking first place with 11.5 million.

Blockchain-based games such as Axie Infinity pioneered the play-to-earn model aimed at giving gamers absolute property rights for their digital assets. As a result, many players have generated income from the hours spent playing. The Pokémon-like game charges its users for buying and selling tokens for land and Axie characters. The platform then returns 95% of its revenue to players as rewards for participating in the game.

During the heat of the COVID-19 pandemic, Axie Infinity became a major income stream for some people in developing countries like the Philippines. In fact, the Philippines accounts for approximately 40% of the game’s user base as the nation turned to the game as a source of income.

However, Butler says, “When you hear stories like this, it’s kind of a feel-good story but underneath the coverage, it is a PR play from the affiliated parties of the game itself. 

“Philippines is the biggest market for this game, which means players putting in money to play the game are also largely based in the Philippines. The numbers aren’t public and we do not know for sure but just from first principles, we know that for every dollar coming in, there is a dollar going out, so you can make assumptions that a lot of that money is actually coming in from the Philippines and we are really just seeing wealth reshuffled rather than being created.”

Are P2E Ponzi Schemes?

Ajibola Lawal, A DeFi analyst, believes that they are not sustainable.

P2E models use a facsimile of the Ponzi model

Ajibola Lawal

“The answer is yes. P2E models, if we use Axie as an example, uses a facsimile of the Ponzi model, that is, the health of the platform comes from onboarding new users. I mean, as is most of crypto, right? 

“Axie has the best numbers in terms of daily users, so why exactly is it not maximising those users in terms of ad revenue, and so forth? No idea. Maybe they’re focusing on aggressive growth in this phase, but that growth is now seeming to plateau out. What gimmick is next?

“And, in all honesty, most crypto gaming is missing the forest for the trees and so are traditional gaming. There’s a mental dichotomy that I find rather frustrating. Regular gaming hates Crypto and Crypto is not thinking like regular gaming. Crypto gaming is just all about one thing: money money money.”

Nyan Heroes co-founder, with the online name ‘Wengie’, spoke on the sustainability of P2E games. Wengie, who has been involved with crypto since 2016, highlighted that a major sticking point for P2E blockchain games is long-term sustainability. She said many P2E games are reliant on a continual stream of new users to remain profitable and suffer from players continually cashing out and taking value out of the game.

We don’t know how many players will be coming into the economy. So, we need to realise that building a game is about the gameplay and the economic system and how sustainable everything is.

Wengie

Wengie explained that Nyan Heroes’ sustainability model is built off several factors, such as introducing an in-game stablecoin to reduce the volatility of its assets, staking rewards on NFTs and a triple-A gaming experience similar to Fortnite, which has “historically attracted players” who want to spend money on the game.

She added, “The way we address it is to come up with a better game where users will actually want to play the game and inject value into the system to balance out the players that come into the ecosystem to take value out.” We can deduce from her explanation that the sustainability of a P2E is heavily dependent on active user base.

Frank Muci, a Venezuelan Economist, Writer and Data Scientist, in his article, “Are Play-to-Earn (P2E) Games Pyramid Schemes?” explained that the answer to the question is “mostly yes.”

The short answer is mostly yes, but sometimes not. It depends on the details of each game and its underlying game economy.

Frank Muci

He further states, “A lot of the P2E gaming models out there have this same basic Ponzi structure. The thing is, it’s not immediately obvious because the underlying economics are obscured by the complexity of the various currencies and assets involved (Ethereum, in-game tokens, game-related cryptocurrencies and NFTs) and by the large volatility in their prices.

“In current P2E games, instead of getting U.S. dollars for your NFTs, you get in-game tokens or crypto-currencies on some blockchain, which you can then sell for stablecoins (like Tether) to cash out. This complicates things (cognitively) but does not change the underlying economic model or requirements for sustainability too much.

“The only way for the subset of P2E players to sustainably get money out of the game (measured in USD) is for an external income stream (unrelated to P2E) to feed money into the game. This income stream is required for platforms to buy back the crypto-assets created in-game and thus create demand for them, so that they are ultimately redeemable for stablecoins at a reasonable price.”

Speaking with Tomer Warschauer Nuni, the Head of Marketing at Kryptomon, a ‘Play-and-Earn’ platform, he explains that the P2E space attracts a lot of scammers.

The P2E industry does attract a lot of scammers and opportunists who are looking for a way to make some quick cash

Tomer Nuni

“Unfortunately, the P2E industry does attract a lot of scammers and opportunists who are looking for a way to make some quick cash, who are abusing the idea behind crypto gaming.

“In general, “play to earn” is never sustainable, and mostly is indeed a Ponzi scheme. That’s why for example we said a long time ago, that we are creating a “play AND earn” game – where players will be first PLAYING AND ENJOYING A GAME, while having the opportunity to earn money – and not WORKING in a game they don’t enjoy to make some cash.

“Imagine “play to earn” like a mine of diamonds, where the game owners are selling very high-priced shovels to mine them. What happens when all the diamonds have been mined?… exactly.”

What makes them Ponzi’s?

Frank Muci uses an imaginary game to explain what makes P2E games Ponzi’s.

“In this game, players buy NFTs for 100 dollars from an imaginary GameCo to “start playing.” Then, they can use the NFT in-game to earn a return of 1 dollar per day for a year, payable by GameCo to their debit account. For the buyer, the NFT purchase pays for itself in 100 days (if paid in full) and returns 265% over a year (again, if paid in full). It looks like a great deal!

“As new players join the game, GameCo accumulates USD extremely fast from the NFT sales. However, eventually, the hype dies down and the market saturates. Fewer and fewer people buy new NFTs as everyone realises the model isn’t sustainable. When this happens, GameCo’s bank balance begins to decline until it reaches zero thanks to a large number of recurring $1 pay-outs and near-zero inflows. Inevitably, GameCo goes bankrupt.

“In the end, players that bought NFTs early and accumulated rewards for 100 days or more are net winners, and the players that joined late are the net losers. The game is strict “zero-sum.” For every dollar gained, a dollar is lost by someone else. Early-comers “made money” because late-comers incurred losses of up to 100%. This imagined videogame is a textbook Ponzi scheme.”

The Way Forward

What makes blockchain games better for gamers is the gaming economics behind the platform. A platform like Forte seeks to offer a new way to create more sustainable business models for developers by integrating blockchain-powered services that would foster real economies within them. 

Blockchain had to be the centre of this innovation as it enabled innovative new economic models by allowing for tokenised assets through fungible and non-fungible tokens.

Blockchain helps provide liquidity to in-game economies through fungible tokens representing in-game currencies. It could turn in-game assets, like weapons or character skins, into traceable and tradable assets by turning them into non-fungible tokens, all tradable for real cash.