How can we improve the blockchain-based economy of the present and the future?

Over the past few years, we've seen a lot of blockchain games come and go. Most of the players who survived were faced with a dwindling player base and floor price, and a constant loss of value that seemed to be never-ending.

Why is this happening?

Even the most economically complex traditional multiplayer genre is building monetary valuations and population growth. EVE Online is one of them, with player-driven economy and realism. However, even with a strong economic design, it faces challenges such as stagflation and fewer players.

Other games have also suffered from economic problems, such as hyperinflation in Diablo 3. Its economic design failed to cope with the impact of real money auction houses, which led to a severe depreciation of gold.

The traditional gaming economy has challenges such as inflation, stagflation, and player immigration, and an open blockchain economy needs to address these issues. This article will explore how to improve the blockchain-based economy, especially how to integrate traditional economic frameworks. It's a complex topic, but through discussion and reflection, we can refine the series step by step.

I. Reasoning

1. The blockchain economy is not a game economy

Traditional game design doesn't take into account the broader opportunity cost of external markets and players. In the blockchain economy, game assets need to compete with multiple emerging competitors, not just other in-game currencies.

Every player has to think: Why hold your currency? "Everyone can create currency, the key is why you choose your in-game currency. ”

Now that more people can easily deploy stock token contracts, this blockchain game wants to tokenize its currency. Some people think that just "making it fun" can sustain ecosystem value, but that's not an easy task. Fun is the most important consideration when developing a game, even if you're building a sustainable economy, make sure players enjoy your game.

In the blockchain space, your game needs to be fun and it needs to be reasonably structured. This way you can maintain player interest without losing value. Make sure to leverage player feedback during development to keep them engaged and supportive of your game.

But let's move on. Considering the current technological progress and the environment we are in, I propose a slight update:

Everyone can create money, and the key is to make it competitive.

Currency competition

The currency of a blockchain game should have five attributes of competitiveness: stable value, deep liquidity, transparent distribution, wide acceptance, and high circulation speed.

Value stability means that the value of the currency is relatively stable within the range recognized by the user. Deep liquidity means that a currency can be traded in large amounts without triggering volatility. Transparent distribution requires that monetary distribution be open and fair. Broad acceptance means that others are willing to accept payments in that currency. The high velocity reflects how often the currency is traded within the ecosystem.

Most of the existing game tokens are "value-added", more akin to stocks than competitive currencies. These tokens are incompatible with the Automated Market Maker (AMM) liquidity framework, and their distribution is opaque and has limited acceptance. This can diminish the game's potential. In the blockchain world, users can quickly lose confidence in a currency and convert it into another stable currency.

The collapse of in-game currency can be attributed to a variety of factors, including speculation, value extraction, and developers' neglect of the open economy. Efficient money needs to meet basic needs, or it may lose its store of value.

2. Is your game aimed at developing countries?

In Edward Castronova's dissertation, he explores the virtual society in EverQuest, comparing it to the economy of the real world. This virtual world has its own unique economic characteristics, and although it is very different from the real world, its similarities are also intriguing.

We looked at factors such as currency exchange rate fluctuations, foreign exchange reserves, property rights, governance, social institutions, and economic liquidity. The article will focus on the importance of reducing currency volatility, obstacles, and solutions, and explore the concept of foreign exchange reserves and their role in the structure of the economy.

Future articles will explore meaningful digital property rights, the critical role of governance in the economy, building social institutions to ensure sustainability, and designing for economic mobility in Eternal Game.

3. Money is not magic

Money is not magic, and neither is the value it represents. This fact seems to have been overlooked in the translation of the cryptocurrency space, where too many Dogecoin and Pepe coins are speculatively worth millions of dollars. True value does not emerge from the abyss and is arbitrarily painted with lucky currency;

Currency fluctuations

Currency volatility is a common phenomenon in the crypto ecosystem and is almost intrinsic to technology. It is common to set a hard-coded cap on the token supply to ensure digital scarcity and stimulate speculation. However, this scarcity can make it difficult for assets to cope with market volatility. The fixed supply also provides some safeguards against the arbitrary creation of money by privileged entities, but this design is not perfectly suited to assets as a medium of exchange. For tokens, the most desirable currency may be a resilient supply that can maintain relative stability and facilitate efficient transactions.

Adjusting the money supply is not an easy task, and many multiplayer games and economic systems in the world find this. In order to solve the problem of inflation, game developers try to guide players to use currency and resources through different means. However, in an open market, players may compare playtime to monetary value, optimizing game behavior for more efficient or fluid results, rather than achieving the developer's intended utility.

This behavior can lead to automated or large-scale money-generating tasks, accelerating inflation and further exacerbating the problem. Third-party gold dealers in the game take advantage of the demand for in-game assets, resulting in excessive currency depreciation. In terms of the monetary system, there is a need to better design the faucets to prevent them from being exploited.

Another example is the Venezuelan black market in Runescape. During the Venezuelan economic crisis, many people discovered ways to make money in the game, which led to a severe devaluation of the in-game currency and economic problems.

Overall, designing an effective monetary system is not an easy task. For example, EVE Online takes a sophisticated approach to fighting inflation and managing its in-game currency.

This chart demonstrates the power of the market economy, revealing that transaction taxes account for about 50% of direct money outflows. The variety of classes and value-added services in EVE provides a more natural balance between new currency generation and other in-game activities.

However, EVE's real inflation rate remains a cause for concern. The Active ISK Increment in the chart indicates the amount of ISK outflow from a player who left the game or was banned from an account. In a closed economy, this metric makes sense, but in an open blockchain economy, the concept does not apply. It is difficult to determine exactly how many new ISKs are considered "sunk", as some player accounts may be reactivated.

With these factors in mind, the blockchain-based EVE economy could face higher real inflation, causing the currency to depreciate faster than expected. It is possible that they deliberately kept inflation high to offset the potential deflation caused by the reduction in circulating supply.

Schrödinger's Active ISK Delta

To avoid these situations, developers should seek to make their currencies – and their economies – more competitive.

• Build confidence in currency valuations – currency reserves, stability practices, and liquidity guidance.
• Assets of value in your currency – convertible into governance assets, treasuries, or similar assets.
• Develop intrinsic demand drivers – taxes, inherent costs, and entropy.
• Distribute your currency fairly – competition, friction, activity, and risk.

Ideally, these frameworks will be implemented simultaneously to reduce volatility and stabilize ecosystem valuations. Before we dive in, let's talk a little bit more about why stability is so important.

4. Stability is the key

Don't we want to let the number go up?

Currency volatility has a direct impact on the attractiveness of an economy. More stable economies need less incentive to attract investment, while volatile economies require a higher risk premium to attract capital. In the blockchain space, similar concepts of risk premiums also exist, such as the means used by various projects to incentivize investment. These incentives may attract speculative investment, but they can also lead to inequality, dilution, and depreciation. This behaviour is similar to that of capital outflows in less developed countries. In a blockchain ecosystem, investors may leave the project, causing a loss of value.

Stability is essential for capital cohesion. In a blockchain environment, stability helps increase the competitiveness of the project, attract more capital inflows, and encourage investors to continue supporting the project. This stability leads to capital accumulation and prosperity for ecosystem participants. In addition, stability reduces the need for a risk premium, allowing projects to focus on more sustainable asset allocation methods, such as competition and contribution. Ultimately, the synergy of these factors can build a stronger virtual economy and extend monetary influence beyond gaming. Next, we will discuss how to achieve this stability, as well as the importance of accumulating and preserving foreign exchange reserves.

2. Methodology

1. Monetary reserves

Currency reserves are foreign currencies held by a country's central bank or other monetary authority and are seen as a measure of a country's economic stability and resilience to financial shocks. In blockchain games, the security of currency and project investments is related to the depth of funds held in their liquidity pools and vaults. The foreign exchange reserves of these games may exist in the form of ETH to ensure the safety of funds, while other competitive assets may not be as stable as ETH.

So, how does the game earn monetary reserves?

Blockchain gaming has one advantage over developing countries: it's a game. If the game itself is deemed valuable, it is possible to channel the initial foreign exchange reserves by selling citizenship, similar to a governance asset. For example, blockchain games can direct funds to the game's decentralized vault by selling governance assets. This approach provides a strong reserve support for the game and reduces the risk of contribution from the player base. If the game fails, players can collectively decide to liquidate the vault and reclaim most of the value.

Developers can submit detailed proposals to players, outlining development goals and outcomes, and use a checkpoint funding allocation model. This model sets a low threshold for voting to ensure that developers keep their promises and receive funding based on actual results.

Developers may also consider generating revenue from secondary sales of the underlying assets and using part of the proceeds for infrastructure development and expansion. Doing so aligns the value of developers and the ecosystem, increases demand for project assets, and generates more revenue for responsible developers.

Once you have your initial reserves, how do you increase them?

2. Currency inflow

Currency inflows are essential for economic stability, similar to the foreign exchange reserves of developing countries. In the blockchain game, the concept of this inflow can be considered in terms of four aspects: exports, foreign direct investment, financial instruments, and investment interest and dividends.

In the gaming ecosystem, "export" refers to the sale of a product in any currency other than the project currency, such as an initial mint, a sale in the secondary market, or an additional asset sold in a non-national currency.

"Foreign direct investment" is similar to an inflow of funds for infrastructure construction or internal investment in the game, and the liquidity is often paired with a national currency (e.g., ETH).

A "financial instrument" can be the use of liquidity investments to accumulate foreign exchange reserves, similar to specialized financial instruments created by central banks.

"Investment interest and dividends" can be achieved through ETH staking, similar to how the Nouns DAO uses ETH vaults to create inflows.

Leveraging secondary sales to capture more value doesn't technically directly bring value inflow to the ecosystem, but it can increase overall personal wealth, enhance the competitiveness of the economy, encourage reinvestment, and promote more capital to circulate in the in-game market or return to the local currency. Export taxes or royalties can be an effective means of capturing economic activity.

3. Royalties are used as export taxes

Royalties, a source of revenue for blockchain businesses, are actually an important and misunderstood stream of money. Although most of the revenue streams end up in the developer's coffers, this leads to a "leakage" of capital, i.e., the value that flows out of the ecosystem. This leakage weakens the value of the ecosystem because the funds cannot be directly reflected in the internal assets.

Compare two projects: Project A and Project B: Project A incorporates royalties directly into its governance assets, while Project B's revenue goes directly into the developer's wallet. This means that Project A's assets have a higher intrinsic value because these funds are able to be reflected in its governance assets. In the blockchain space, if funds leak and cannot be reinvested into the ecosystem, the value of the currency may decrease, leading to a weakening of the confidence of the ecosystem and affecting the depreciation of the currency and related assets.

In a blockchain economy, the lack of intrinsic demand for a project's assets can lead to a decrease in its value, unlike the real-world economy. In this case, external demand for the asset does not stabilize its value. As a result, an ecosystem that can automatically redirect value streams back into the economy may be more attractive than a single entity that permanently siphons off its value. This mechanism of automatic repatriation of value enhances the robustness of the ecosystem and is more attractive than economies that rely on a single entity.

Royalties are essential to the blockchain economy. This tax captures ecosystem demand and converts it into money, benefiting residents and reducing speculation. Redirecting this value to the treasury managed by the participants boosts confidence and increases asset value.

Contrary to the popular belief that royalty inflows only peak at the beginning of a project, I predict that a well-structured, competitive, high-speed blockchain economy can sustain a consistent inflow of royalties. Achieving this goal requires the creation of export demand, which depends on stabilizing the currency and building intrinsic value.

We have injected funds into the treasury by injecting initial minting funds and collecting export taxes, what are the next steps?

4. Stabilization measures

Traditional games are often less concerned with stabilizing exchange rates, and will even explicitly prohibit currency outflows from the gaming ecosystem. Therefore, the price of foreign currency does not matter, and most players do not participate in the unofficial grey market.

Second Life is one of the few games that effectively manages exchange rates. Developers strive to maintain a relatively stable price by buying back and selling in-game currency, such as keeping Linden at around $240 per dollar. The stabilization mechanism of this approach is actually monetized.

Another stabilization strategy is to adopt a semi-stable monetary framework. These currencies are not directly pegged to the value of assets such as the US dollar or gold, but rather allow for a certain level of market volatility while providing a stable buffer that gives investors more confidence.

The way to effectively manage these semi-stable currencies is to set a range of values within which free fluctuations are allowed. Once the value is out of range, an automatic stabilization mechanism is triggered to keep it within the desired range. This technology can be achieved through a decentralized two-tiered Tobin tax.

Paul Bernd Spahn, a German professor of finance and adviser to the International Monetary Fund, proposed a two-tiered Tobin tax that could serve as an effective mechanism for monetary intervals. It charges marginal taxes within the price range to maintain monetary stability and prevent manipulation and speculation. Implementing this tax strategy through smart contracts minimizes costs and mistrust. Such a tax system should theoretically make the market smoother, especially since high taxes outside the scope will deter currency manipulators and may even profit those who try to manipulate the currency. In the blockchain version, it is feasible to establish a stable range based on a time-weighted average price or median price oracle.

Once the price is out of range, dynamic taxes will come into effect, such as high taxes to discourage purchases or sales. Taxes that fall outside the expected range can be rewarded in various forms, such as burning taxes, rewarding liquidity providers, depositing into the protocol treasury, or tilting towards traders who help the price return to the desired range. At this stage, we have established a mechanism for stabilizing reserves and speed-based inflows into reserves, and implemented a tax mechanism for keeping the currency stable. However, for the monetary range mechanism to be more effective, price volatility needs to be further reduced so that volatility-based taxes are not triggered too often.

5. Liquidity is a scarce resource

In this text, the author acknowledges the Treasure DAO for proposing a new concept of mobility and explains their three metaphors for mobility: weather, time, and space. He proposes four new conceptual frameworks to distinguish his conceptualization of the open blockchain game economy. One of them is liquidity as a scarce resource.

Treasure DAO proposes a new concept of wrapping liquidity tokens into game assets through $MAGIC. Their Balancer Crystals are considered an energy source that can only be minted by liquidity pool tokens of the MAGIC-ETH pair. While this design is a step in the right direction in accumulating ecosystem fluidity, there is one problem: a lack of scarcity.

Balancer Crystals can be minted indefinitely, which means they lack the expected value, causing players to be uninterested in them.

The authors propose the possibility of solving this problem, such as limiting the supply of Balancer Crystals or letting the Token liquidity in ETH determine the new supply. This way of automatically reducing the issuance of new assets could increase their future value and might incentivize people to mint this scarce resource to invent new use cases.

The author's conception of these scarce resources is called the "Aether Core".

Let's say there will be a batch of Ether Cores available for minting every week. The available amount is determined by the amount of ETH available in the liquidity pool. When the number of Ether Cores in a batch decreases, the price of minting Ether Cores (in the form of LP Tokens) increases linearly. To illustrate this, consider that each LP Token is initially backed by 0.1 ETH. It's important to note that each LP token is made up of an equal amount of ETH and native tokens, and in a real-world environment, the ratio will dynamically adjust based on transactions, but for our example, it will remain static unless otherwise stated.

Illustrate the core supply dynamics of Ether

In a hypothetical five-week scenario, the authors describe the interplay between the etheric core and liquidity. In this description, the lack of liquidity at the beginning of an ecosystem is first described, and then it shows how the amount of ETH in the liquidity pool fluctuates as the Ether core supply changes.

This scenario depicts a cycle: a decrease in the supply of Ether cores leads to faster minting speeds, increasing the total liquidity of the token. This liquidity enhances price stability, attracts more participants to contribute liquidity, and drives demand as the utility of the asset increases. Ultimately, the design ensures that there is no surplus of Ethercore cores and that supply is adjusted as demand changes.

The authors emphasize that the demand at the core of Ether is key, as it is the engine of early demand for assets, driving liquidity accumulation. The following sections will delve into the implementation of such assets and place them in a hypothetical version of the game, The Citadel.

Liquidity as a charter

Liquidity is seen here as a charter-like charter and charter concept, with the ether core representing the injection of external funds, similar to foreign direct investment. Through this liquidity position, it is possible to provide a return on ecosystem utility and contribute the exchange of these liquidity positions to the game vault, increasing foreign exchange reserves. The demand for Ethercore will be the main source of buying charters, and the idea can be applied to other utilities as well, who need to hold the game's governance assets to participate.

Players can use Ether Core to buy articles of incorporation, start their own company, and issue shares, which will be a way to raise funds or assets. This framework incentivizes people to buy out failed companies and increase their intrinsic sources of value. This design positions the financial sector as a pillar of stability for the game, which will also lead to deeper liquidity as the number of players and companies increases. City charters and outposts can be purchased similarly, but at a higher cost. Building an outpost requires resources and an Aether Core, and ownership will be prorated based on the Aether Core contribution. The establishment of outposts will boost local market growth, create more arbitrage opportunities, and provide new possibilities for the development of game modes and economic activities. At the same time, these outposts are required to pay taxes to the castle in order to maintain their concession status and encourage players to deploy competitive outposts to meet market demand.

Liquidity as infrastructure

Liquidity is not only a part of the gaming economy, but also a key component of infrastructure. Similar to real-world hard and soft infrastructure, it can play a variety of roles in gaming. In the Castle game, the Aether Core can activate infrastructure, such as transportation systems or long-distance travel structures. The establishment of these systems requires player cooperation, and liquidity plays a key role in this process.

There will be usage fees for these infrastructures, but they are not attributable to individual players. They are public goods that solve common problems in decentralized governance, such as encouraging cooperative construction and preventing free-riding. In terms of soft infrastructure, EVE Online's CONCORD system is an example, similar to an automated police force. In Castle, with a similar mechanic, the security system will be supported by the Aether Core. Player contributions to liquidity will help ensure the safety of the starting area, which is essential for becoming a trading hub. As the game expands, so does the use of similar infrastructure. The potential applications for gamified liquidity in the blockchain gaming ecosystem are limitless, so new systems need to be designed with consideration on how to incorporate these assets. Royalty-driven liquidity

Royalty-driven liquidity will use ETH as a guide for economic activity, allowing it to flow directly to the ecosystem currency. This concept is called "The Forge".

The Forge is a smart contract whose main function is to mint liquidity tokens. It receives the royalty stream and, after reaching a certain threshold, increases liquidity by purchasing a matching of local currency and ETH and deposits it in the vault.

This design allows the flow of ETH to be directed from anywhere and serves as an automated generator for LPToken to meet market demand faster. The use of royalties creates a value feedback loop, and increased trading volume will lead to more liquidity generation, which in turn will enhance monetary stability and drive increased demand for assets.

In the event of a cold start, liquidity pools can be activated with Treasury funds, and the proposal for such liquidity seeds can boost participants' confidence that the protocol is willing to support their own currencies.

Similar to how governments in developing countries stabilize currencies through reserves, players can make proposals for broad or concentrated liquidity.

Broad liquidity includes fungible ERC-20Token value range, while Concentrated Liquidity uses non-fungible ERC-721Token to provide in-range liquidity. The latter complements the two-tiered Tobin tax and can be further improved with an automation manager like Gamma Vault.

When a proposal provides a large amount of liquidity, it can cause a shock to the asset supply, resulting in a rapid increase in liquidity and a decrease in the new supply of the asset.

In liquidity and stability, stability should take precedence. Assets that are stable and have intrinsic value are usually more liquid than tokens. Liquidity attracts stability, not trying to enhance it through incentives.

Stability is very important to attract liquidity, and the first relatively stable ecosystem will be very strong in attracting liquidity. Such stability strategies include a two-tiered Tobin tax and asset correlation, the latter of which has been shown to reduce impermanent loss.

Design intrinsic value and determining relevance are key issues in design.

3. Implementation

1. The virtual world needs an anchor

Most small countries choose to stabilize their currencies with the world's largest and safest currency, and in our blockchain world, that's ETH. The Ethereum Standard ™ (ETHS) anchors the value of the ecosystem to the ETH held, maintaining a relatively stable value in ETH.

ETH has the qualities of an ideal reserve commodity, similar to gold, such as scarcity, utility, credible neutrality, and mimics treasury bonds through gas fees and staking features. ETH can be volatile relative to the U.S. dollar, but it is more stable relative to crypto-native assets and protocols. ETH is a more dynamic option than the unnecessary risk of using USDC-based currencies as anchors in on-chain vaults.

The accumulation of ETH in a high-speed blockchain gaming economy can lead to accelerated scarcity of assets. Holding ETH as a reserve standard can bring immediate stability and is expected to generate the emergence of intrinsic value, which can be analogous to the valuation of traditional assets, forming a connection between the assets of the blockchain ecosystem, called "value entanglement".

Value entanglement

In the blockchain ecosystem, projects often ignore the way traditional businesses are valued. Business valuations rely on data such as asset, cash flow, and goodwill accounting, while governance assets are derived from assets in the treasury, predictable revenues, and ecosystem sources. What difference would make if we didn't ignore this latent value, and what if we intentionally designed and nurtured it?

I use the term "value entanglement" to describe this concept. It refers to the interconnectedness of values between different parts of an ecosystem. This entanglement can be seen as a form of positive correlation between assets. For example, company shares are linked to company assets, and although they are not directly interchangeable, their value affects each other.

In the blockchain ecosystem, "value entanglement" can be understood as the correlation between the value of governance assets and the underlying assets in the treasury. This entanglement makes different assets correlated with each other, and when the value of one asset changes, the value of the other asset changes accordingly.

In the blockchain ecosystem, there is no direct fungibility between governance assets and assets in the vault, but they exist for a linked value similar to the company example. Most of the time, when governance holders liquidate the treasury, all participants receive a fair share. This selective liquidation helps to reduce the risk of the player base and gives the governance assets intrinsic value.

Looking at real-world examples, a company's good performance, product popularity, or high dividends may drive up the stock price, and vice versa, it can lead to a discount in value. This kind of cash flow valuation is common in traditional markets, but it seems to be overlooked in blockchain projects. This clear and understandable approach to valuation should be part of the blockchain theory of value entanglement, and should not be discarded just because of "blockchain".

Another example is in a virtual space, where the value of a newly built home is tied to nearby properties, unlike the physical space. Similarly, blockchain-based projects behave similarly to this value correlation, exhibiting a similar pattern.

For example, Nouns is an NFT project and decentralized autonomous organization that auctions off a new governance asset every day in perpetuity. Each noun is assigned to the founder of the project. As of now, there are more than 800 nouns and the vault contains more than 28,000 ETH. The "reserve backing" value of each noun is about 36 ETH. However, there has been a recent drop in the amount of noun auctions, which may be related to the fact that a large amount of ETH has been spent. To be clear, the goal of this project is not to make a profit, but to "spread memes", and here we just use Nouns as an example to explore the theory of value entanglement.

These examples show that most noun bid values depend on the intrinsic value of treasury holdings and the protocol environment. However, why has the amount of winning bids dropped so much since the end of 2021 to date? It may be related to the amount of ETH spent, which is about $22,535.

The project's future auction revenue may be reduced due to ETH consumption until its yield exceeds the value backed by the reserve. The discount may be due to poor future cash flow expectations.

Currently, they use interest on ETH, which can generate an annual interest rate of about 1,000 ETH, but this will be depleted in the short term. A more focused and consistent budget may increase confidence in the DAO and drive an increase in auction bids.

The unutilized royalty income, which is more akin to export taxes, is a missed opportunity. This will allow revenue to go directly into the coffers rather than into the hands of speculators, which is expected to bring more net inflows in the future and boost project confidence.

In the Nouns protocol, there is a value entanglement between the value of the vault and the noun. Nouns accumulate more ETH by using the value of the vault to auction off new assets, although this dilutes the governance power of current holders.

This is not a new concept, but rather a demonstration of how traditional asset valuation frameworks can be used to create intrinsic value in the blockchain economy and scale that value. This is true of many tokenomics concepts, but they are applied to newer, more technologically advanced projects. How to correlate the intrinsic ETH value of the treasury with the protocol currency through an auction-based exchange rate may be one way to stabilize the currency.

Auction exchange rate

The USDC exchange rate has remained around $1, thanks to arbitrage and intrinsic value. This positive expectation gives traders an incentive to keep the exchange rate within this range.

Similarly, the intrinsic value of governance assets is tied to ETH in the vault. If we set up a redemption mechanism for governance assets, it will be able to capture the value associated with the ETH in the vault. This asset-related reduces risk and incentivizes the liquidity supply of the pair.

The price of the currency fluctuates according to the conversion of the governance asset. However, it cannot be directly redeemed at a ratio of 1:1 or higher, otherwise it will limit the ability of monetary policy adjustment and bring the risk of bank runs.

We use an auction-based floating exchange rate mechanism. The price of a currency relative to another asset is determined through auction.

In short, the auction mechanism is used to realize the relative linkage between money and governance assets, and at the same time, internal and external mechanisms are used to drive the demand for money and maintain its value stability.

2. Treasury bonds

Or how to use illiquid reserves in the national currency.

The third pillar of foreign exchange inflows to developing countries is financial instruments. Although there are already different types of bonds in DeFi, there is a lack of bonds that offer low-risk potential in the form of ETH. This bond must compete with the return of ETH staked, potentially resulting in a dilution of the token's value.

Designing better blockchain bonds requires three priorities: generating competitive returns, ensuring that the principal amount of the bond maintains its value in ETH, and helping to stabilize the national currency.

One potential solution is IP-LAB, which combines inflation-protected bonds, liquid bonds, and abstract liquidity ideas. This type of bond obtains liquidity in the national currency by offering to be paid in liquidity pool Tokens, and the interest rate is determined through a Dutch-style auction. The principal amount of the bond is protected from inflation, providing low-risk liquidity, and the liquidity pool Token used to purchase the bond will be converted to the equivalent local currency at maturity.

Both the number of bonds and the price of the bonds will be determined at the start of the auction and will remain the same. The auction will be based on the coupon rate rather than the price of the LP token. With Dutch auctions, the coupon rate will start from the base value and increase by a percentage at regular intervals until the reserve ratio is reached. The auction ends when the number of bond bids reaches or the reserve interest rate interval ends. Similarly, using a unified auction mechanism, all bidders will receive the highest coupon rate for their final bid.

Embodiment 1

The game issued 1,000 bonds issued by IP-LAB, each priced at 500 LP Tokens. The coupon rate starts at 6% and increases by 2% every 30 minutes. Only 100 bonds were tendered in the first 30 minutes, and the coupon rate rose to 8%. In the second tranche, another 300 bonds were bid, but with 600 still available, the coupon rate increased to 10%. In the third phase, another 200 bonds were tendered, bringing the total to 600. After the next 12% gain, a bidding frenzy came to snap up the remaining 400 bonds. Since all bonds have been sold, the auction ends. The offering locks in a coupon rate of 12% at which all bidders issue bonds.

In this example, the game will successfully issue 1,000 bonds and collect around 500,000 liquidity pool tokens at minimal game vault cost. If the cost of each LP Token is around $1, this would be equivalent to contributing $500,000 in new liquidity to stabilize the national currency.

Since the auction was fully subscribed, it successfully weighed the appropriate risk premium for current bond demand at a rate of 12%.

Embodiment 2

Using the same data in Table 1, the game issued an IP-LAB issue of 1,000 bonds at a price of 500 LP Tokens per bond. The starting coupon rate is again 6%. There were no bids for the first five periods. As the sixth instalment begins, we see sporadic bids for 100 bonds with a coupon rate of 16%. The interest rate for the seventh tranche rose to 18%, and another 150 bonds were tendered. In the final stage, another 250 bonds were tendered at a 20% rate, bringing the total to 500. At the end of the auction, only 500 of the 1,000 bonds were bid. The offering locks in a 20% coupon rate, at which all bidders issue bonds.

In this example, the coupon rate auction was unsuccessful in measuring the appropriate risk premium for the demand for the bond because the bond was not 100% subscribed even with a reserve rate of 20%. However, all 500 bidders received the highest coupon rate for this bond offering.

Using the coupon rate as an indicator of demand allows the market to determine the risk premium based on current conditions, allowing the game to issue bonds in a healthy and measurable way. Market demand is important to accurately gauge the health of economic instruments such as government bonds. A similar method is used to auction US Treasuries.

3. Inflation protection

Another important goal of the bond is to protect the principal from inflation. This means that if the value of the native currency (NC) in ETH decreases, the principal amount of NC will be adjusted upwards to compensate for the price difference. If the value of NC reverts to the original ratio, the principal is readjusted, but not reduced beyond the original ratio.

The quarterly price ratio adjusts the principal, and then the interest rate is paid based on the new bond principal.

The bond will have a fixed lock-up period (12-24 months), at the end of which the local currency principal amount will be adjusted at the final quarterly checkpoint and can be redeemed.

Let's look at an example of a 24-month IP-LAB.

Embodiment 3

The Game Vault issued the IP-LAB bond from Example 1, which has been fully subscribed with an annual coupon rate of 12%, assuming the bond matures in 2 years. We can also venture to say that 500 LP Tokens are roughly equivalent to 1,000 national currencies as the underlying bond principal. The table below shows the change in principal and the amount of interest paid based on changes in "inflation", which in our case is defined as the change in price relative to ETH.

Bonds pay different amounts of interest in different quarters and are related to the rate of inflation. The design takes into account competition with ETH yields, risk, currency correlation, and market demand. Bonds also have potential utility and can be used in the blockchain ecosystem. The goal of the auction game is to get the maximum subscription at the lowest potential coupon rate. These tools work better when used in tandem, taking into account the basic functioning of the ecosystem.

Taxes, inherent costs, and entropy

The game needs to design mandatory spending to drive the intrinsic demand for money, just as the state relies on taxes to drive money. The auction mechanism can be seen as a form of taxation that drives demand for money through participation in coercion. Sample mandatory expenditures include infrastructure tax, market transaction tax, corporate tax, etc. It is also possible to set inherent costs, such as food costs, and entropy costs, such as equipment maintenance costs. Mandatory spending is a better protection against inflation than selective spending. At the same time, it is also necessary to control the new supply of money to avoid problems in the later stage. Forced spending can drive intrinsic demand for currency, but it is important to consider gameplay and not overcomplicate the player experience.

In general, it is believed that through the rational design of mandatory expenditure, the effect of national tax driving currency can be simulated to a certain extent, so as to promote the intrinsic demand and value stability of game currency.

Monetary system

Often, it is believed that inflation occurs in the game because the currency cannot be removed from circulation, but this explanation is too simplistic. The monetary system needs to be carefully balanced, with too much sinking leading to an increase in the value of the currency and too little leading to depreciation. Any player in the game can create a new currency, improving the unevenly distributed real economy.

What's the problem? Faucets are designed to be simple incentive schemes that can be easily abused by players. Rewards are quickly depleted when they are insignificant or easily accessible.

When designing tokens in a game, friction and time investment need to be considered. The real economy is a competitive system, and the lack of competition for money and assets will make value more vulnerable. Players are often able to outwit and make seemingly difficult activities simple. The faucet should be designed to be a competition between players.

Designing the economy through currency competition will more accurately simulate the real economy, create a higher rate of trade, and make mandatory spending more efficient.

Finally, there needs to be friction and the possibility of failure in an unsustainable economy, and there will be no winners and losers in an unsustainable economy.

4. Review

In-game currencies need to be competitive to compete with other digital currencies. This needs to take into account factors such as currency stability, liquidity, transparent distribution, etc.

Games can be seen as developing countries, and stability mechanisms such as reserves, property rights governance, etc. need to be designed. The money supply also needs to be resilient rather than the risk posed by a hard cap.

It is necessary to design various mechanisms to promote internal demand, such as infrastructure costs, market transaction taxes, etc. Liquidity also needs to be dynamically adjusted as the value of the currency changes.

Financial instruments such as government bonds can be anchored to the value of a currency. With all the relevant elements in place, the game economy is expected to become an important pillar of the Ethereum ecosystem. Establish a stable support framework for open player currencies as a whole.

It is hoped that this set of design ideas can cope with future environmental changes. A successful case can help write a new standard for the game economy and lay the foundation for future ecological construction.