Inflation Design Patterns in Tokenomics

Inflation Design Patterns

How to control in-game currency inflation has long been a hot topic when designing game economies. Web3 games are no exception to this. This article discusses how we can design in-game currencies, especially for web3 games, in terms of token issuance methods and inflation control measures.

Types of Token Issuance

Inflation

Inflation in crypto acts as a levy on those who hold tokens and do not participate in staking. By imposing conditions for participation in staking, you can create artificial pressure to transfer the token share among holders. The simplest form is a token share transfer from non-stakers to stakers. You can apply this mechanism to introduce a well-designed complexity into the game economy. For example, suppose both FTs and NFTs are required for efficient participation in staking. In that case, token shares will gradually migrate from those who have either FTs or NFTs to those who have both FTs and NFTs and are participating in staking.

The inflation rate determines the speed of this transition; the higher the inflation rate, the faster the transition. Therefore, when choosing the inflation curve, we must be clear about whom we want to favor. For example, the desired inflation curve will differ depending on whether we want to favor initial or current holders.

If you want to favor current holders and shift a token share from past holders to current holders, you can do so by maintaining a high inflation rate.

Conversely, you could reward early adopters who took the risk and held onto their tokens in the early days by using a square root type of issuance. It shows a curve similar to a token supply with a halving such as Bitcoin’s.

It is possible to fix the emissions per unit block and not favor any particular entity.

Inflation Control

The supply curves in the previous section make it clear that it is impossible to control inflation rate with a linear burn against a quadratic supply.

Suppose that the supply of tokens you have designed grows in line with a quadratic curve. To keep inflation down, you ensure that each user must consume tokens regularly, or they will not be able to participate in the token minting. Would this keep the inflation rate down?

It depends on the amount of tokens the user must consume. For example, suppose the number of tokens in circulation increases quadratically(blue line), but the number of tokens consumed increases linearly(red line). In that case, the total amount of the newly supplied token will still increase quadratically(green line), as the graph above shows.

To keep inflation low while keeping the token supply quadratic, you must separate in-game tokens from on-chain tokens and introduce a tax or withdrawal fee proportional to the issuance amount when users withdraw tokens to the wallet.

It is certainly not an essential solution. This mechanism preserves time until the game grows enough to let users consume enough in-game tokens. Since this is to avoid an unexpected death due to the expected high inflation rate, the team has to create utilities of the tokens in any case. It works only as a temporal buffer. When this solution doesn't work, it's better to reduce the original inflation rate.

GameFi's Seigniorage Spectrum

The essence of GameFi is the competition for the right to issue currency.

There are three types of games: those that delegate the right to issue currency to users, those that work as a central bank taking control of the issuance right, and those that delegate the right to issue currency to smart contracts.

1. The game master does not intervene in the process of users generating NFTs and tokens by using NFTs, so the supply of tokens increases in an unregulated manner.
2. The game master continuously determines the number of tokens to be issued per unit of time, so whether it is fixed or variable, the game master has the right to control it.
3. The game master writes the number of tokens issued and how they will be distributed in smart contracts, which are immutable.
4. Although not observable now, a dynamic and immutable issuance mechanism will emerge in the future in which the game master writes rules in smart contracts to change rules, thereby changing the number of tokens issued with the flexibility of a central bank.

The distribution of currency issuance rights is like a spectrum, with myriad variations between the two ends. For example, some game masters do not impose direct restrictions on the number of tokens issued, but they do impose restrictions on the supply of NFTs and the number of times they can use them.

Spectrum Examples

Below are three examples of seigniorage control.

No NFT limit * No FT limit = Chaotic style

• Users can breed NFTs as they want.
• Users can mint FT by using NFT.
• The supply of NFT and FT increases exponentially.

No NFT limit * FT limit = NFT Durability style

• Users can use NFT for limited times to mint FT.
• The supply of FT may increase exponentially, but (Newly issued FT - Paid FT) is predictable.
• Mandatory token consumption is included in this category.

NFT limit * No FT limit = Limited NFT issuance style

• Users can use a limited number of NFTs to keep minting FT.
• The upper limit of FT increase per time is capped linearly.

The fee imposed when users withdraw tokens from off-chain (in-game) to on-chain acts as a tax. There are two ways.

Fixed withdrawal fees

1. All users pay the same rate of tax
2. Withdrawal amount * tax rate

Dynamic withdrawal fees

1. Those who consume tokens in-game pay less tax.
2. Fees = Withdrawal amount * tax rate - Token consumed in-game.

Closing Remarks

The token issuance methods discussed here are valid for tokens that have no monetary value. As application-specific blockchains and layer 2 emerge, fees for simple transactions will approach zero. Under such circumstances, the usage of tokens will be diversified, and more dynamic and experimental token distribution methods will be explored.

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