Could the Pay-Per-Play (PPP) Model Secure the Future of P2E Gaming?

TL;DR

1. Play-to-earn (P2E) games have a surprisingly long history. P2E games did not first appear in web3 games, but also existed in traditional games. With the emergence of various game contents, including web3 games, the play-to-earn model is expected to become more popular in the future.
2. To adequately reward non-paying players in a free-to-play (F2P) game, it is crucial to have enough "paying users" who invest in gameplay. Among various monetization methods, the pay-per-play (PPP) model offers the advantage of charging a relatively large number of users by collecting an entry fee.
3. PPP games offer rewards to winners, which are determined by entry fees and various monetization elements. To attract new users and promote healthy retention, the plus sum game structure should ensure a higher number of 'winners' compared to 'losers.’
4. While there may not be numerous success stories for the P2E model in games yet, the paradigm shift towards rewarding gamers based on their in-game contributions is an inevitable and unstoppable change.

1. What is Play-to-Earn (P2E) and how did it originate?

Play-to-Earn essentially means "earning money by playing games." The idea of players making money while gaming predates the emergence of web3 games.

1-1. P2E examples in traditional games

The ‘Haste Shop’ in Lineage, a popular MMORPG of its time, serves as a classic P2E example. In Lineage, characters can boost their movement and attack speeds using 'green potions' obtained from hunting. Various wizards can also cast 'haste' buff spells on characters, increasing their speed as if they had acquired 'green potions.' Consequently, the demand for trading 'haste' buff spells among Lineage players arose, leading to exchanges involving the in-game currency, 'adena.' This gave birth to ‘Haste Shops,’ specialized workshops for enchanting characters with ‘haste.’ Players who operated these shops could earn Adena much faster than average players, with some earning as much as $1,000 per day. In 2002, the 'Haste Shop' was ultimately banned as the Korean government deemed it to be meandering.

Another example is the Diablo III auction house. In 2012, a legendary axe was sold for $16,000 in the Diablo III auction house. Rumor has it that the buyer of the item was earning $36,000 per month from the Diablo III auction house at the time. Furthermore, the "Executioner's Blade" in Lineage continues to fetch tens of thousands of dollars in sales.

There are even more ways for players to profit. In addition to earning money from playing RPGs, there are numerous other methods, including streaming game broadcasts, account boosting services, and paid gaming companion services. Despite strong sanctions from Riot Games, the account boosting service of League of Legends still operates. E-Pal, a paid gaming companion service, demonstrated its marketability in 2021 with an $8 million investment from a16z and Galaxy Interactive.

Why do P2E elements arise naturally without being explicitly designed by game companies? This can be easily understood by examining the structure of gameplay. "Top skilled players," who spend significant time playing, can accumulate more in-game goods and experience than average players. Players seeking to progress more quickly than the average player will likely be interested in purchasing items obtained by top performers. This naturally results in the trading of in-game items for cash. As the gaming industry expands, the development of in-game tokenomics will be inevitable.

1-2. The future of P2E shaped by metaverse and web3

In an interview, Dr. Jang Dong-sun, a Korean neuroscientist, asserted that "with the advent of the metaverse, the boundaries between offline and online labor are collapsing." As people spend more time online, the value of digital assets is bound to increase. Consequently, it is inevitable that a system that fairly compensates individuals contributing to the online ecosystem will progressively emerge.

A similar argument is presented in an article by Arianna Simpson, a partner at a16z. She explains that this new model allows gamers to actually own aspects of the game and benefit from their contributions, as the game becomes more successful and more popular.

As hyper-premium content increases the spending of paying users, the reward structure can be adjusted to not only benefit top users, but also recognize those who make smaller contributions to the game.

1-3. The current state of Web3 P2E gaming

But web3 P2E gaming still faces challenges. The world's leading Web3 P2E game, Axie Infinity, generated $1.2 billion in annual revenue and 2.7 million monthly active users in 2021, a record-breaking figure considering that the game was not listed on the Google Play Store or Apple App Store. One of the keys to Axie Infinity's early success was its reward structure, which allowed players to earn up to $600 per month.

Axie Infinity distributed its native token, Smooth Love Potion (SLP), as rewards. As a flexible token with a price dictated by supply and demand, when players earned rewards, the SLP supply grew and its price fell. Conversely, when users purchased SLP tokens, the price rose due to increased demand.

The issue arose from the fact that demand for SLP tokens was primarily driven by an influx of new users, as these tokens were used exclusively for creating in-game NFT items and mainly purchased by newcomers. This challenge was so apparent that it was even addressed in Axie Infinity's whitepaper.

It's also worth noting that the majority of users were buying SLP tokens as an investment for future returns, not to consume game content. At the time, Axie Infinity's game graphics were indie, and the content was limited, so the game content itself wasn't enough to attract and retain players and drive SLP purchases. As most investors were primarily focused on the profitability of SLP token rewards, a decrease in profitability led to a mass exodus of users from Axie Infinity, who then sold their in-game assets. This resulted in a significant drop in SLP token prices and a rapid collapse of the ecosystem.

As of February 2023, when the price of SLP had fallen by over 99% from its peak, Axie Infinity's monthly active users had dropped to around 400,000, an 85% drop from the monthly active users Axie Infinity had previously achieved.

1-4. Implementing sustainable P2E

Despite the present condition of Web3 P2E gaming, as exemplified by Axie Infinity, the argument by Dr. Jang and Arianna Simpson remains valid. As the digital economy expands, user rewards will inevitably increase. However, for the in-game economy to thrive, the quality of game content must be enhanced. Axie Infinity failed to deliver high-quality content that met user expectations.

Following Axie Infinity's example, the web3 gaming industry has shifted its focus to content quality. Notable instances include Yuga Labs, which secured $450 million in funding in 2022 to develop a metaverse game, and Limitbreak, a web3 game developer that received $200 million in funding the same year, both emphasizing the importance of high-quality game content.

At the same time, the question of sustainable tokenomics continues. In addition to new user acquisition strategies, developers are considering token activation structures that make users buy tokens in proportion to the time they spend in the game. For example, they are trying to apply Pay-to-Win, Pay-to-Progress, and Cosmetics/Collectibles BM, which are billing structures commonly used in Free-to-Play games, as token consumption methods for Web3 P2E games.

Let's explore the pay-per-play model, in which users pay an entry fee for each gameplay, and analyze live games that utilize this model to determine if it could be a viable alternative for generating consistent token consumption.

2. Pay-Per-Play Model

2-1. Definition of Pay-Per-Play (PPP) Model

Arcade games serve as classic examples of pay-per-play (PPP) models, where players insert coins for each round. While not as prevalent today, some games offering monetary rewards still employ the PPP approach. Poker, for example, necessitates an entry fee or "buy-in" for participation, with the winner receiving a reward exceeding the buy-in amount. PPP games ensure consistent token consumption through compulsory entry fees. However, it is crucial to have appealing reward structures and incentives to attract players.

The PPP model, in which players can lose money depending on their performance, may constrain the user base. To appeal to more players, implementing safety measures such as tiered systems with adjustable entry fees or incorporating a more dynamic P2E model into existing games could be considered.

2-2. Regulatory Risks of the Pay-Per-Play Model

Games that combine tokens and NFTs face distribution bans in South Korea due to potential conversion into gambling. The PPP model, where players pay to enter and win prizes, raises concerns when coupled with elements of luck. However, the regulatory landscape for blockchain games is anticipated to change. Under current laws, non-excessive cash transactions are not illegal, in-game items are considered assets, and the decentralized nature of blockchain makes regulation less effective. Nevertheless, until clear guidelines are established, the Korean blockchain game market will bear high regulatory risks.

In major gaming industry countries like the US and Japan, NFT/P2E regulations are either nonexistent or self-regulated. As a result, Korean blockchain game developers such as Planetarium Labs, WeMade, and Marble X focus on overseas exports. Numerous countries have legalized online casinos, with varying regulations recognizing poker as a game that involves mathematical calculations and understanding of human psychology. The United Kingdom, Australia, Canada, and India have legalized online casinos and put regulatory measures in place. For instance, the UK has regulated gambling since 2005, implementing consumer safeguards to prevent money laundering and other harms.

3. Case Analysis of Web3 Pay-Per-Play Models

Now, let's analyze the tokenomics of Web3 games that have adopted or plan to adopt the pay-per-play token model.

[Case 1] Arc8

A. Game Introduction

Developed by GAMEE, a game production studio, Arc8 is a mobile app platform featuring various hyper-casual games. Since its launch on the Polygon Network, Arc8 has been one of the most played blockchain games. With over a dozen games to choose from, players compete in head-to-head matches, multi-player tournaments, and more, earning GAMEE tokens for winning.

B. Tokenomics Analysis

Arc8 uses $CREDITS for practice games and $GAMEE as the primary in-game token. Players can earn $CREDITS in practice games, but they cannot be monetized. All in-game spending is done with $GAMEE tokens, which are used for tournament entry fees, in-game NFT purchases and upgrades, and platform governance voting rights. Players can also receive free $GAMEE airdrops for inviting friends or completing daily quests and can purchase $GAMEE through QuickSwap, a Polygon DEX, or in-game payments.

Pay-Per-Play Structure

① Entry Fee

• Entry fees can only be paid using $GAMEE tokens.
• Entry fee tiers range from 1 GAMEE to 100 GAMEE. By achieving a certain level in the game, players can progress to higher tiers.

C. Business Performance

Since its launch in October 2021, Arc8 has been one of the most played blockchain games. The platform started with ten games and, as of January 2023, features 14 self-produced games and one partner game.

However, metrics tied to revenue structure underperform. Based on an analysis of on-chain data from January 1 to January 24, 2023, about 2,884 wallets topped up with an average of 195 GAMEE tokens (approximately $1.46), totaling 562,521 GAMEE (around $4,219). Assuming a platform fee of 15%, the revenue earned by GAMEE during this period is about $632. When annualized, we can estimate that GAMEE generated approximately $9,624 in annual revenue.

• This figure is based on the assumption that there are no other wallets besides the listed Hot Wallet. The Hot Wallet address was confirmed by actual service deposits and withdrawals and determined to be the only address by analyzing the number of transactions and GAMEE deposits and withdrawals between January 2023.

D. Implications

The low revenue, despite a substantial number of users, can be attributed to two factors: (1) the low entry fee and (2) the limitations of the game format.

• The first reason for Arc8's low profitability is the low entry fee. Arc8 entry fees range from as little as $0.01 to as much as $1. However, with the most basic $0.01 entry fee, players need to play an average of 62 games to reach the next tier of tournaments. In the subsequent tier, where players can wager upto $0.05, they need to play over 125 games to advance further. If a player's skill level is not high enough, they may need to play even more games, or they might not be able to advance at all. Assuming that the majority of users stay within the $0.01~0.05 tier, the company's revenue from a game with a $0.01 entry fee is $0.003, and from a game with a $0.05 entry fee, it's $0.015. This means that if 60,000 users play 10 games per month, the company generates between $1,800 and $8,000 in monthly revenue. Considering GAMEE's employee count of at least 56, as disclosed on LinkedIn, this revenue is sufficient.
• The second reason for Arc8's low profitability stems from the limitations of the game format. Arc8 games are asynchronous hyper-casual gaming duels. Once a duel is established, players play their own games, tally their scores, and then compare the results to determine the winner. The fact that players cannot view their opponent's gameplay and have the outcome decided for them diminishes the excitement of competition and can create a psychological backlash, especially when players lose. Due to its simplistic game format, Arc8 may struggle to scale up participation fees.

[Case 2] KOF Arena

A. Game Introduction

KOF Arena, published by Marble X, Netmarble's Web3 publishing company, is a cross-platform fighting game that reinterprets the original fighting game for mobile devices. It is beginner-friendly, as skills can be performed with simple button clicks. The game enhances the PvP (Player-vs-Player) experience by allowing players to predict opponents' skills and execute them at the right time.

B. Tokenomics Analysis

KOF Arena features seven types of goods:

• Four goods are used in the Pay-to-Progress model, focusing on character collection and enhancement. With over 30 fighter characters, each acquires a character card and undergoes enhancement through the Mastery system. Enhancements can be made using free reward currencies such as Mastery Points, Mastery Keys, and Mystic Cubes or by converting paid Diamonds into Mystic Cubes to expedite growth.
• Three types of currency are used for PvP matches and mining. Winning a PvP game rewards players with $FM, which can be cashed out by converting it into $FCT, a blockchain token. Black Diamonds are required for this conversion and can be purchased in the app.

Players must equip a Controller NFT to receive $FM rewards. The NFT's durability decreases with each use, and mining stops when it is exhausted. Players must pay $FM to repair the controller and resume mining. As a result, KOF Arena matches adopt a pay-per-play structure.

What sets KOF Arena apart is that even losers receive rewards exceeding their entry fee. For example, a Silver 5 ranked user earns 151 FM for winning and 20 FM for losing, surpassing the average controller repair cost of 8 FM.

Pay-Per-Play Structure

① Entry Fee

• Each round requires players to pay an $FM repair fee.
• Higher-level controller NFTs correspond to lower $FM repair fees.

➂ Platform Fee

• No tokens are earned from fees since rewards exceed entry fees.
• Each play generates inflation due to prize money.

KOF Arena does not enforce token consumption in direct correlation with gameplay; it issues a greater number of tokens than consumed. As a result, the in-game tokenomics cannot depend exclusively on the PPP model.

In the meantime, FCT tokens acquired via FM conversions have sustained their value relatively well, even 60 days after launch. This can be attributed to the staking system that shares non-PPP revenue with FCT token holders. A segment of KOF Arena's revenue is converted into $MBX(MARBLEX) tokens and allocated to FCT stakers, thereby promoting FCT consumption.

Introducing a mechanism to adjust the conversion ratio between FM and FCT prevents excessive token issuance. As FM mining rate increases, more FM is consumed when converting to FCT according to the algorithm, mitigating FCT inflation.

C. Business Performance

Since its November 2022 launch until January 2023, KOF Arena has achieved 4.8 million global cumulative downloads in two months and 1.38 million monthly active users in December. However, revenue is low compared to user numbers, with KOF Arena's revenue sitting at approximately $110,000, even without considering Web3 BM. The main reason is the low average revenue per user in KOF Arena's primary markets.

This contrasts with Netmarble's other blockchain game, "The Second Country," which attracted users from the U.S. and Europe and generated considerable revenue.

The user base is also insufficient. With just over 2,500 wallets holding FCT and a low number of FCT transactions in comparison to other Marble X-launched games, it becomes clear that KOF Arena needs to prioritize enhancing user engagement and expanding its revenue channels to bolster its overall financial performance.

In conclusion, KOF Arena has demonstrated potential in user acquisition; however, it encounters obstacles in revenue generation and user engagement. By fine-tuning its tokenomics, optimizing the pay-per-play framework, and investigating supplementary revenue streams, KOF Arena possesses the capacity to evolve into a more sustainable and lucrative blockchain game moving forward.

D. Implications

Despite attracting 4.8 million users, KOF Arena saw less than 1% engagement in the Web3 PPP model. The primary reason for this low conversion rate lies in the action fighting genre's constraints, where outcomes depend solely on skill. The probability of a low-skill player defeating a high-skill player approaches zero, leading to only a small number of top players engaging in controller PvP.

Nonetheless, KOF Arena's structure rewards both winners and losers beyond the entry fee, making the PvP token model accessible to a broader user base. Users with a win rate below 50% can still obtain token rewards exceeding the entry fee by participating in a match.

For sustainable rewards, the pay-to-progress business model must also boost revenue, fueling demand for the $FCT token. Unfortunately, because KOF Arena provides enjoyable gameplay even without paying-to-progress, like many action mobile games, KOF Arena suffers from low ARPU. This reduced revenue equates to smaller rewards for those participating in the PvP token model, potentially raising concerns for long-term token sustainability.

[Case 3] Shrapnel

A. Game Introduction

Shrapnel, developed by Neon Studios in the United States, is an Extraction FPS game. As a subgenre of FPS, Extraction FPS focuses on players competing against one another to gather weapons and items while attempting to escape the map successfully.

Players confront and engage in combat to secure valuable NFT items. Successful escapees can permanently store their acquired loot in their inventory for use in future battles or direct sales on the secondary market. However, players who perish on the battlefield lose the majority of their equipped items. With only a few players surviving each map, items are burned after every battle, fostering sustainable tokenomics that maintain token burn rates proportionate to gameplay.

B. Tokenomics

Shrapnel utilizes a single token, $SHRAP, which serves as the base currency for the game's secondary market. Players can sell items earned in the game for $SHRAP and purchase items using $SHRAP.

$SHRAP will also fuel future User-Generated Content (UGC) markets, such as in-game gun skins and maps. Gun skin creators spend $SHRAP to mint and upload their creations to the market and stake $SHRAP to increase their products' visibility. Popular map creators and curators who identify and stake promising user maps first also receive $SHRAP rewards.

Shrapnel employs pay-per-play tokenomics for each battle. Participants' entry fees are determined by the value of the items they equip (in $SHRAP) when entering the battle. Players who perish on the battlefield forfeit their entry fees, while those who successfully escape earn an additional item as their victory reward (also in $SHRAP).

Pay-Per-Play Structure

• Participating without any equipment is an option; however, your chances of survival diminish, making it less likely for you to endure the battle and secure any winnings in the form of gear.

② Rewards

The gear you acquire in-game and successfully escape with becomes your reward. Your prize pool is determined by your Max Carry Weight. You can sell the earned gear on the secondary market in exchange for $SHRAP.

➂ Platform Fee

• The deflation resulting from equipment loss due to player deaths is designed to be higher than the inflation caused by new equipment drops.
• The platform fee can be computed using the following formula: [total value of all equipment equipped by participants + new equipment dropped on the map] - [equipment acquired by the winner] = total equipment lost (platform fee)

④ Token Value Accrual

• As the platform does not collect and monetize equipment left on the map, the platform fee is automatically burned in this model, ensuring a sustainable ecosystem.

The foundation of Shrapnel's tokenomics lies in the single token system that focuses demand on $SHRAP tokens, while the PPP mechanism contributes to burning $SHRAP tokens. The transparent spending and burning model is anticipated to counterbalance inflation caused by equipment drops on the map each round.

Simultaneously, since players can partake in the game and pursue rewards without any equipment, it effectively prevents losing players from abandoning the game and deters excessive rewards being granted to users who have not paid the participation fee due to the diminished survivability without gear. By integrating random elements (e.g., magnetic fields, item drops, etc.) commonly found in the battle royale genre, the game can sustain a stable user base that remains engaged.

C. Business Performance

Shrapnel is currently under development, with a planned alpha release in late 2023 and a public beta launch set for 2024. The game is being developed by Neon Studio, a new game developer established by former members of HBO Interactive—a group responsible for creating games and immersive content using HBO IP. This connection has attracted significant interest. Released in the latter half of 2022, the cinematic and in-game trailers have gained substantial attention, with the Twitter video surpassing 100,000 views.

4. Conclusion

Finding success stories proves challenging.

Unfortunately, there are few examples of PPP games that exhibit successful tokenomics. Arc8 generates low fee revenue, due to the small scale of tournament fees relative to the player base. While KOF Arena has effectively drawn in users, the constraints of the action game genre result in a limited number of players engaging in pay-per-play PvP.

But Pay-Per-Play token model is evolving

KOF Arena tackled high user churn by creating a system with an entry fee that grants both winners and losers rewards exceeding the fee. However, pay-per-play alone cannot resolve the inflation issue, so maintaining reward levels depends on the successful implementation of the Pay-to-Progress billing model for character development.

Shrapnel offers sustainable tokenomics through a transparent token outlet and a natural token burn model based on gameplay. Despite the low survival rate, user churn is partially alleviated as players can enter battles without paying to participate and still earn rewards. This is why the game's future development is eagerly anticipated.

A Positive-Sum game instead of Zero-Sum

The most significant issue with pay-per-play games is that losing players tend to abandon the game. The solution lies in designing games with more winners. Rather than creating a 50:50 winner-loser ratio, aim for a 60:40 or 70:30 split. Additional prize money awarded to winners can come from the revenue generated by paying users. Moreover, incorporating the value of growth, competition, and social status into tokenomics is essential.

A more pressing question to consider is, "Why do Web3 games distribute revenue to the users?" The answer is straightforward. Sharing revenue with users serves the game company's best interests, as it fosters economies of scale by drawing more users through incentives. Axie Infinity saved over 50% of the cost of paying publishers and app stores through token rewards, which were then redistributed to users. Similarly, Planetarium Labs' Nine Chronicles eliminated intermediaries and rewarded users directly, resulting in an impressive 61.9% retention rate for new users returning seven days after registration.

Financially rewarding users for their contributions represents a paradigm shift that cannot be halted. As Jeff Bezos famously said, "Your margin is my opportunity." We eagerly anticipate a future where users are fully rewarded by drastically minimizing the previously unquestioned middlemen.

Disclosures

The opinions expressed in this article are solely those of the individual author and do not necessarily reflect the views of Planetarium Labs PTE. LTD. or its affiliates.

Please note that this article is for informational purposes only and should not be construed as investment, legal, or advisory advice. This article is not intended to be a recommendation to invest in any specific asset, and you should not rely solely on its content when making investment decisions.

About Planetarium Labs

References

1. Lineage's first workshop, 'Hayshop', https://m.post.naver.com/viewer/postView.nhn?volumeNo=3140298&memberNo=11264950
2. A game that earns you a month's salary, but 'not in Korea'? Why P2E games are sweeping the world, https://www.youtube.com/watch?v=2sosdA22MuA
3. Investing in Axie Infinity by Arianna Simpson, https://a16z.com/author/arianna-simpson/
4. Breaking the Trance: Crypto Gaming, https://www.mechanism.capital/breaking-the-trance-crypto-gaming/
5. GAMEE Whitepaper, https://wiki.gamee.com/whitepaper/gmee-token/token-utility
6. [King of Arena] Controller Level Up Points, How to Invest Efficiently, https://gamefi.inven.co.kr/invennews/view/278752
7. KOF Arena Whitepaper, https://kof-arena.gitbook.io/the-king-of-fighters-arena/whitepaper
8. MarbleX Whitepaper, https://www.marblex.io/file4
9. Shrapnel Whitepaper, https://www.shrapnel.com/Shrapnel-White-Paper.pdf