TLDR

• The two most popular GameFi design approaches today are AAA-level blockchain games focused on playability and fully on-chain games that emphasize fairness and the spirit of Autonomous Worlds.
• Current challenges in GameFi development include: 1. Unclear player goals between fun and profit, leading to speculative behavior; 2. Lack of regulation, making it difficult to break into mainstream markets, with speculative users being the primary players; 3. High complexity of on-chain operations, creating barriers to entry.
• GameFi’s focus should be on playability, not the speculative “earn” aspect.
• The concept of ServerFi includes: allowing players to combine their in-game assets and eventually gain sovereignty over future servers; offering sustained rewards to highly engaged players to maintain token vitality and a healthy game ecosystem.

1. The Current State and Challenges of GameFi

Image Source: MPOST

During the 2021–2022 bull market, following the rise of Axie Infinity, The Sandbox, and Stepn, GameFi and the P2E concept quickly gained popularity. Similar breeding games (e.g., Farmer World) emerged rapidly. However, due to the flawed dual-token economic model (governance tokens and output tokens) and the NFT design (items like pets, tools, and shoes that continually generate tokens), P2E, essentially a Ponzi scheme, quickly collapsed as these games’ outputs far exceeded demand, leading them into a death spiral.

After a few years of consolidation, two primary design directions have emerged: AAA-level blockchain games focused on playability and fully on-chain games aligned with the spirit of Autonomous Worlds. If we consider blockchain as the foundation, it accurately preserves the states of all nodes and entities. Additionally, blockchain formally defines the rules introduced through computer code. A world with blockchain as its foundation allows its inhabitants to participate in consensus, running a computer network that reaches an agreement each time a new entity is introduced. — <Analysis of the Core of Fully On-Chain Games: MUD Engine and World Engine>

1.1 AAA Blockchain Games:

Image Source: abmedia — illuvium

Integration of Traditional Games and Blockchain Technology:
Web2.5 games represent an innovative form that bridges the gap between traditional games (Web 2.0) and fully blockchain-based games (Web 3.0). These games retain the core gameplay and user experience of traditional games while incorporating certain blockchain elements, such as digital asset ownership and decentralized player-to-player transactions.

Partial Decentralization:
The decentralized elements in Web2.5 games are typically focused on specific features or modules. For instance, virtual items, characters, or currencies within the game might be managed and traded via blockchain, ensuring true ownership of digital assets for players. However, the main game logic, operating environment, and most of the content remain on centralized servers. This hybrid model ensures smooth gameplay while integrating decentralized aspects.

Higher Performance and Broader Accessibility:
Since Web2.5 games are not entirely dependent on blockchain infrastructure, they usually outperform fully on-chain games in terms of performance and user accessibility. The support of traditional servers allows these games to handle large numbers of simultaneous players and provide richer, more complex game content without being limited by the current blockchain technology’s throughput and response speed. This design allows Web2.5 games to balance high performance with the innovative features of blockchain technology.

Balancing Traditional Game Experience with Blockchain Advantages:
Web2.5 games aim to find the optimal balance between the immersive experience of traditional games and the new features brought by blockchain technology. By integrating decentralized asset management, transparent transaction records, and cross-platform asset transfers, Web2.5 games not only maintain the depth of traditional gameplay and storytelling but also offer players new avenues for value creation and enhanced engagement.

Combining AAA Standards with Blockchain Games:
Traditional AAA games are typically developed by large teams with high budgets, featuring high-quality graphics, complex storylines, and deep player interaction. AAA blockchain games build on this foundation by incorporating the advantages of blockchain technology, allowing players to enjoy top-tier gaming experiences while truly owning and freely trading their in-game virtual assets, creating a gaming experience with tangible real-world value.

Broad Support for Game Types:
Due to the asset-on-chain model of Web2.5 games, virtually any game genre can theoretically apply this approach, from traditional adventure games to strategy and shooter games. Currently, the most popular type of Web2.5 game is the massively multiplayer online role-playing game (MMORPG).

1.2 Fully On-Chain Games:

According to 0xPARC’s game paper collection Autonomous Worlds, fully on-chain games must meet five key criteria:

1. All data originates from the blockchain: The blockchain serves as the sole source for all critical data, storing and accessing everything of significance, not just ownership information.
2. Game logic and rules are implemented via smart contracts: Core game activities, such as battles, are fully executed on-chain through smart contracts, ensuring transparency and trustworthiness.
3. Open ecosystem principles: The game’s smart contracts and client code must be entirely open-source, allowing third-party developers to create plugins, third-party clients, or interoperable smart contracts, fostering creativity and expandability.
4. Permanent existence on the blockchain: The game must be capable of continuing without relying on core developers or their clients. If the game data and logic are permissionless and the community can directly interact with core smart contracts, the game remains operational even if developers exit.
5. Interoperability with the real world: Blockchain offers a gateway for game digital assets to interact with real-world value, enhancing depth and connecting the virtual and real worlds.

Under these criteria, fully on-chain games are considered “Autonomous Worlds” based on blockchain as their foundational infrastructure.

1.3 Addressing GameFi’s Pain Points:

Image Source: Discovermagazine

GameFi’s innovation lies in the financialization of games, but its Pay-to-Earn model carries the stigma of a Ponzi scheme. Reflecting on the history of video games, which emerged in the 1970s as a commercial entertainment medium and became a significant industry in Japan, the US, and Europe by the late 1970s, the video game industry experienced over two decades of growth after the 1983 crash, eventually competing with television and film to become one of the most profitable visual entertainment industries worldwide.

Despite decades of evolution, bringing games on-chain still faces significant pain points and challenges:

1. Unclear player demands:

• GameFi currently falls short in playability and user experience compared to traditional games, even as AAA blockchain games improve. With Pay-to-Earn and lacking gameplay, players often have to choose between fun or profit. If neither is satisfied, they will quickly leave.
• Many GameFi projects overly rely on token price fluctuations, coupled with market volatility. If token prices plummet, players’ interests suffer, drastically reducing player retention, further accelerating the game’s decline.

1. Regulatory shortcomings impede mainstream adoption:

• GameFi’s financialization is hindered by immature global regulatory frameworks, introducing legal risks for players. This uncertainty limits GameFi’s reach into broader markets, with current players mainly being speculative users.

1. High complexity of on-chain operations:

• For non-crypto users, GameFi has a high barrier to entry. Players must understand crypto wallets, token trading, and other blockchain operations, which are not user-friendly. This technical barrier limits GameFi’s user expansion, particularly among traditional gamers.

2. Yale University Paper: What Does the ServerFi Concept Propose?

Source: ServerFi: A New Symbiotic Relationship Between Games and Players

2.1 Concise Summary

Note: This section does not verify the source or authenticity of this paper, but rather distills and explores its main points. The original text is available in the extended link (1).

GameFi has redefined economic production relationships by combining “gaming” with “finance” to create a new “play-to-earn” model through blockchain technology. These games create crypto assets via NFTs and fungible tokens, offering decentralized ownership, transparency, and economic incentives for players. However, challenges remain in terms of market stability, player retention, and sustainable token value. Compared to traditional online games, blockchain games leverage unique digital asset storage and increasingly sophisticated incentive models to build new relationships between players and developers, driving the transformation of electronic societies. However, in the context of Web3, the traditional, leisurely gaming experience has been relegated to secondary importance.

Most games have a lifecycle, and CryptoKitties is no exception. Its breeding mechanism increased the supply of “cats,” gradually reducing rarity and value. As more players joined, the market quickly became saturated, making it difficult to maintain token prices. Without enough active players, supply-demand imbalances would further exacerbate devaluation. Players who invested heavily in breeding might find their returns diminishing as the initial scarcity is replaced by oversupply, leading to a decline in player interest and participation.

The original paper, aside from briefly discussing the history of blockchain gaming, focuses on identifying the primary flaws in token economic models using the entropy principle. It introduces two new models: ServerFi and the model of Sustained Rewards for High Retention Players.

The combination of entropy theory and token economics offers a profound perspective on understanding token flow and value fluctuations in blockchain projects. Entropy theory suggests that disorder (entropy) in a closed system increases over time. In token economics, this concept manifests as an initially orderly token distribution that becomes increasingly chaotic as more tokens enter the market and trading intensifies, leading to price volatility and inflation risks. Without effective regulatory mechanisms, the system may enter a high-entropy state, resulting in token devaluation and declining player engagement. Therefore, incentive mechanisms and regulatory measures are needed to mitigate entropy and maintain market stability and player participation.

For instance, Axie Infinity’s token economy has several key flaws: 1. It heavily relies on the continuous generation of new tokens (such as SLP), leading to oversupply and token devaluation; 2. Speculative behavior during TGE triggers price volatility, destabilizing the market; over the long term, the exit of early speculators could cause token prices to plummet, harming regular players; 3. The economic model lacks sustained incentives, making it difficult to maintain player enthusiasm; 4. High initial investment costs pose a barrier for new players, limiting the game’s accessibility.

Based on these discussions, the paper proposes two suggestions to improve GameFi token economic models:

• ServerFi:
  ServerFi aligns with the Web3 ethos, allowing players to combine in-game assets to gain ownership of game servers. This mechanism incentivizes deeper investment by letting players accumulate and merge NFTs and other digital assets to control servers, enhancing engagement and loyalty.
• Sustained Rewards for High Retention Players:
  Project teams can monitor player behavior and offer targeted rewards to highly retained players, keeping tokens vibrant and the game ecosystem healthy. This approach encourages ongoing participation and drives the stability and growth of the token economy. For example, a portion of server revenue could be airdropped to top users, creating a “play-to-earn” dynamic that motivates players to continue contributing.

Model Validation:
Yale University evaluated the effectiveness of these token economic models through group behavior simulation experiments, accounting for real-world randomness (introducing random noise from various angles, including individual behavior and population growth).

The experiment results showed that, in the asset synthesis privatization model (left side), player contribution values continued to rise with more iterations, indicating that the model effectively maintains player engagement and drives long-term value growth. On the other hand, in the Sustained Rewards for High Retention Players model (right side), contribution values significantly increased initially but then quickly declined, highlighting the challenge of maintaining long-term player engagement.

The original paper suggests that while the strategy of rewarding highly retained players may boost engagement in the short term, it could exacerbate player stratification, marginalize less active players, and raise barriers to entry for new players, eventually leading to a vicious cycle. In contrast, the ServerFi mechanism, through fragment synthesis and lottery-based randomization, enhances social mobility among players. Top players must continue to contribute, while new players still have opportunities to share in the rewards, maintaining system vitality and sustainability.

Source: ServerFi: A New Symbiotic Relationship Between Games and Players

2.2 Stripping Down the Complex Narratives: What Is ServerFi Essentially About?

When breaking down the literal meaning and explanation of ServerFi, “Server” translates directly to a server, and ServerFi is akin to a server network. In simple terms, its primary goal is to decentralize ownership rights, deepening Web3’s decentralization spirit by “breaking up the server” and allowing players to gather in-game assets to eventually gain sovereignty over future servers.

However, ServerFi alone is not enough, so it’s complemented by the model of Sustained Rewards for High Retention Players. In essence, the longer players play, the more “server fragments” they can collect. Yet, the original text does not clarify whether long-term engagement requires direct, continuous consumption or simply extended playtime. If ongoing token purchases are still needed to sustain the balance between consumption and earning, the core remains Play-to-Earn. Nonetheless, this innovation represents a step toward reducing or improving upon the purely speculative Play-to-Earn Ponzi-like mechanisms.

In one sentence: The ServerFi + Sustained Rewards for High Retention Players model fundamentally represents an improvement and innovation in the financial design parameters of GameFi.

3. Final Thoughts: Are GameFi and ServerFi Fundamentally Flawed Directions?

3.1 Which Matters More: Gameplay or the Earn Mechanism?

Undoubtedly, gameplay is far more important. The essence of a game is to provide an immersive experience for players; the “Earn” aspect is merely an added bonus. A game that focuses solely on earning without being fun is not a game — it’s just a digital slot machine. The key to attracting and retaining players lies in delivering an enjoyable gaming experience, not in relying on a Ponzi-like short-term influx of traffic. If a game offers only earning opportunities without engaging gameplay, then GameFi is nothing more than a flawed concept.

Economic incentives should only serve as supplementary value to retain players, encourage participation, and attract more people to the game. The Earn mechanism should drive the in-game economy and token circulation by empowering players rather than binding them. In GameFi, these two aspects complement each other: gameplay provides long-term appeal and a steady player base, while the Earn mechanism attracts initial users and drives economic cycles. Therefore, the only sustainable goal for a game is to be fun.

3.2 What Narratives Do GameFi and ServerFi Tell?

GameFi tells the story of the Pay-to-Earn model in blockchain gaming, which saw a surge during the 2021–2022 bull market. The Ponzi-like hype led to the rise of games like Axie Infinity, The Sandbox, and Stepn. However, when the hype subsided, only a devastated landscape remained, leaving behind memories of explosive growth and sparking innovation and experimentation in on-chain gaming.

ServerFi, on the other hand, narrates an improvement on the Pay-to-Earn model by reducing or refining the Ponzi-like nature of pure Play-to-Earn. It further decentralizes the economic and systemic structure, similar to how the protagonist in Ready Player One earns ownership by completing the game. ServerFi offers long-term loyal players the opportunity to gain ownership through a financial lens.

At present, most blockchain innovations essentially revolve around the decentralized evolution of financial systems (or are derivatives of DeFi), and GameFi is no exception. Infusing games with strong financial attributes may not be inherently wrong, but the challenge lies in how to effectively wield the double-edged sword of blockchain’s financial power. The narratives of both GameFi and ServerFi remain focused on innovations in economic model design. If the primary message is just about making money through gaming, then when token prices inevitably crash, players will be left losing money while playing, accelerating the game’s irreversible death cycle. To truly succeed, GameFi needs to return to its gaming roots, focusing on making games enjoyable rather than just designing economic metrics. Perhaps, this is the real path to breaking the mold in GameFi.

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