Learning from Poker: is 'Pay-to-Earn' a sustainable economic model?

Introduction

It’s both challenging and important to design a game to have a sustainable economy.

One of the main reasons it is difficult is because of reward attribution. It’s very difficult to properly proportion game rewards to those who add value to the game's ecosystem, particularly when so many people (bots, bad actors) are explicitly trying to extract for their own economic gain.

As the industry evolves, so do the different solutions. One of the solutions that I see being raised more and more is the idea of ‘pay-to-earn’. This is the idea of players having to ‘bet’ or ‘pay’ an entry fee in order to have the chance to earn.

This article will aim to dive into what this is and the challenges that need to be overcome for it to actually be viable.

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What is ‘pay-to-earn’?

‘Pay-to-earn’ refers to the model where earning requires players to pay a buy-in and compete with others for rewards. This might be in the form of tokens, or for example in putting an NFT on the line with winner takes all. The primary example of ‘pay-to-earn’ in the broader gaming space is Texas Holdem Poker.

There are several benefits to using a ‘pay-to-earn’ model:

• Net loss / resource sink: This is an economic system that can result in a net loss for players and can become a resource sink. Just like poker, players can put in [$x], the game developer can keep or burn [$y], and players can win [$x-y].

• Not reliant on growth: ‘Pay-to-earn’ is also sustainable in that no matter how many players there are, the “earning” opportunity for players remains the same. It’s not reliant on new player growth to be sustainable, and in fact is resilient even if the player base falls.

• Reward player-skill: This model theoretically aligns very well with competitive games where players compete on skill, and could be a natural fit in some genres. Skill-based betting also automatically mitigates bots or gold farms, assuming bots won’t be better than humans at the game.

• Conversion from free-to-play to ‘pay-to-earn’: You can have different versions of the game or multiple game modes to allow players to have a safe ‘training’ ground which might be free-to-play, as well as a more competitive and rewarding ‘pay-to-earn’ mode.

This all sounds great. But based on observations of similar games like poker, I’d argue that the model has challenges in practice.

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Challenges with the model

The core premise of ‘pay-to-earn’ is that the game becomes explicitly about playing for money. Embracing this is part of the game design represents an opportunity but also leads to the challenges below.

1. Paradox of fun vs money: The first problem with the ‘poker’ model is that the game becomes explicitly about playing for money. This results in a fundamental conflict between a game being played for casual fun and entertainment, versus competing in an intense and stressful environment. Most players might like the idea of playing their favourite game and earning, but as soon as real money is involved, it will become stressful and no longer as fun.

2. Embracing luck is necessary but leads to gambling (and regulation): Some people might argue that games like poker can also be played by friends for fun. This is true only because ‘luck’ plays a big factor, and players enjoy the thrill of chance as much as competing on skill. Good ‘pay-to-earn’ games will probably do the same - after all, adding luck is what will get players to keep grinding and give them something to blame for losing. The downside of embracing luck is that this just becomes real-money gambling. Which not only is a highly competitive industry (with much easier fiat on/off-ramps), but also becomes regulated.

3. Rising skill levels damage the game - The next challenge with the ‘pay-to-earn’ model is that the skill level increases over time. If the sole purpose of the game is to compete for money, and as a player you aren’t winning, then you will likely leave to do something else. Therefore over time, the ‘losers’ will churn, while the ‘winners’ keep getting better. Thus the skill level of the game rises almost exponentially. This reduces the earning opportunity (which remember is the reason why players are competing!) and increases the barrier of entry for new players. Rising skill levels not only harms the game but increases churn and reduces growth.

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Overall, I’m excited by the opportunity of ‘pay-to-earn’ and fully expect to see games adopt this model as an attempt to have sustainable game economies or net sinks. However, it’s not as straight forward as it seems, and I expect a few iterations will be required before we see some good industry examples.

Let me know your thoughts in the comments or any other topics you would want me to write about in the web 3 gaming space!