Why "play-to-earn" is a Ponzi scheme
The model is flawed in ways that should be obvious from the name.
Immortal Game, an online chess platform, is only the most recent game to announce they are dropping all “play-to-earn” features of their game.
While “play-to-earn” has been widely hyped, with hundreds of millions of dollars of investment from firms like Andreessen Horowitz, the model is fundamentally flawed at a level that should really be obvious from the name. Where it works, it works only as a Ponzi scheme.
What is play-to-earn and why does it exist?
Play-to-earn games are online games that pay players real-world currency for activities or accomplishments within the game. Usually this is in the form of cryptocurrency or NFTs.
The thought process goes: if you’re spending full 40-hour weeks in World of Warcraft, why shouldn’t you get paid for it? If you dedicate time and effort to in-game progression, why should that progress be ephemeral within the game world, able to disappear at the twitch of a game dev’s finger? (Notably, Vitalik Buterin’s WoW character getting nerfed was part of his motivation for eventually creating Ethereum, now the second-largest blockchain after Bitcoin.)
Sounds great! What’s the problem?
I had high-level characters in Everquest. I have sympathy for the motivation. However, I would offer an alternate comparison: if you spend two hours at the movie theater, why should you pay them $15? Your time is worth more than that!
That answer is more obvious - you’re not working by going to a movie. You’re not providing the theater a service by attending a showing!
These days, jobs can be so disconnected from actual outcomes that they can feel like feeding time into the machine of late-stage capitalism in exchange for money, so it can be easy to forget that work shouldn’t just be occupying people’s time. It should make something of value - ideally, something worth more to the people buying it than it cost to produce it. This is what business people like to call “value creation.”
Of course, it’s not all about goods and services. Entertainment has value. People will pay for fun experiences! You pay the movie theater money, and they provide you entertainment. That’s the exchange of value that’s happening.
How do games create value?
Games are fun! People play games to have fun!
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The most basic economic model for a game is identical to the movie example. The developer makes a game, then sells copies of it. Ideally, they sell enough copies to make more than they spent creating the game, and the players have enough fun that they feel they have gotten their money’s worth. Everyone is better off than they started! Great! Value has been created.
There are other approaches that work. An ad-supported game is a bit more complex, but everyone can still end up better off than they started. The advertiser pays the developer more than they spent to make the game, and the advertiser makes more than their ad money back from people ultimately buying their products. Meanwhile, the players have enough fun to be worth being a little annoyed by ads, and get products that are worth what they pay. Great! Value has been created!
How does play-to-earn create value?
Well.
By the name, it should look like this, right? You’re playing! And you’re earning!
But wait! Both the arrows are going the same way! How does the game developer make back the money they spent making the game? How do they have funds to pay players? For the developer to make money, and players to also make money, money has to be coming from somewhere!
In reality, it looks more like this. Players spend money to get started, and then start to earn money back later.
You may notice that I removed “fun” from the equation. In a play-to-earn game, fun is not the goal. When players expect they are playing in order to earn, they’re not satisfied by losing money in exchange for entertainment.
This causes problems, because newer players can only actually earn money if there are even more people coming in after them to spend money. Play-to-earn doesn’t create value - everyone is hoping to get money out of it, which means more money needs to be constantly coming in.
In fact, this is the exact definition of a Ponzi scheme - “a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors.”
Is that really how it works??
Yes, and at a much larger scale than you would imagine.
Axie Infinity is the most high-profile example of a play-to-earn game, with a peak valuation of $3B. It suffered a $625M hack in March 2022, but the collapse of the economy started even before then. As a June 2022 Bloomberg article succinctly points out, “A financial system consisting of people all hoping to put in $1 and take out $2 can last only as long as someone else shows up believing others will come in after them with more fistfuls of cash.”
With worldwide publicity and over $160M of venture investment from A16Z, apparently those people will keep showing up for a few years. But not infinitely. (Pun intended.)
But people are putting time and effort into the game. Surely that’s worth something?
Sure. And games often have their own internal economics that reward time and effort with resources and progression. That progression is valuable to you, the player; it’s part of the fun of it.
The fatal flaw of play-to-earn is the promise that in-game progression directly earns you real-world money. To have a game that contributes something to the world, rather than just siphoning money from one group of people to another, any real-world money you receive must be in exchange for real-world value.
But remember: the value that games add to the world is fun! That’s not impossible.
A working model would have two major differences from play-to-earn: 1) most players spend money in exchange for fun, and 2) earning players are paid money for providing a fun experience for other players, not just for time and effort.
Of course, that can be a blurry line. In a massively multiplayer game, a lot of the fun comes from interacting with other players and player-created social structures, so there’s some logic in rewarding people for developing those. But you should reward people for doing that in ways that give other people a more enjoyable experience - not for creating modern-day sharecropping.
There are some basic ways games do this already - for example, paid in-game moderators who check tone and maintain a fun game environment while playing themselves.
And I think there are opportunities for lot of other cool approaches, but it requires thinking about game design from a creative and social engineering perspective. Unfortunately for Web3 advocates, not all problems can be solved by adding a blockchain.