CryptoBlades: Just another game economy heading for a cliff?

TL;DR: The numbers simply do not add up.

I have played video games for over two decades now, and whilst the genre and development budget varies greatly, pretty much all games I tried have one thing in common: Their economy sucks in the long run. Earlier games were not really concerned with this. Most games that even had economies were single player and story line driven, so you just put it away when the story was finished, and bought a new one. I call this economic hotfixes by reset. From Pokemon and Skyrim to Cities: Skylines, most single player games still rely on this. 

Then, with the internet came multiplayer games with persistent servers. These games have an incentive to build an economy that encourages the players to keep playing, because the playerbase itself is a valuable part of the game content. However, many of them do not even try. I spent a fair portion of my childhood in World of Warcraft(WoW), and through 4 expansions and countless content patches I realized that WoW actually relied on the same economic hotfixes by reset that single player games do. What they did try was to implement money sinks, but these were in the form of overpriced fluff items that you only need to buy once. I mean, only once per character. Inevitably this did not solve the underlying issues with their game economy, it only extended our walk towards the cliff a little. The result is an endgame where nobody needs anything because they have everything, and we jump around the mailbox while waiting for new content.

There is one game that at least tries, and it’s called EVE Online. Sci-fi and half automatic gameplay is not my cup of tea, but I spent some time in the game just because it plays the economic aspect of their world so much better than other games. EVE is hardcore because if your spaceship blows up it is gone, even in PvP. This means you have to buy or make a new one. This does in turn help fuel a long lasting economy where both resource gatherers and crafters play an important role. I will admit, even EVE has severe inflation because they print massive amounts of currency through quests and the like, but they get points for effort, at least they do not resort to periodic resets. 

Finally, the most recent development is crypto games. Crypto games, especially those that market themselves as Play to Earn have very strong incentives to get their economy right. If you market yourself as Play to Earn but the players cannot profit, you are basically a scam. And we do not want to be scams, right? Right?… Games are naturally unable to create physical value, they can only extract value from the value chain. This value first and foremost comes from the pockets of players who are looking for leisure. However, if you cannot offer more than a reskinned dice roll simulator that can only be played for about 5 minutes a day, then it is hard to claim that you are delivering in this aspect. This brings us to today’s protagonist, CryptoBlades. It is only with a stretch that I allow myself to call this a game in the first place, but that is a topic for another day. Today I want to talk about why I think CryptoBlades cannot last, at least not without tweaks. By the way, did I mention their token is called SKILL, that is some quality irony for a dice roll simulator.

So, what challenges do crypto games need to deal with? First and foremost they need a plan to combat inflation. If your in-game currency is a crypto token the value loss from massive inflation will hurt your promise of earnings. CryptoBlades seems to simply implement a supply limit for this purpose. This might solve the problem or inflation, but it complicates the next point: They need to ensure payouts to the players. Most games just print in-game currency when they want to reward it, but CryptoBlades promises not to do this. Instead, they have a wallet address that holds the funds a player can receive as reward. It becomes obvious that this address needs to get funding from somewhere, or else it will run out of SKILL. From what I can tell this funding comes from 2 sources. First, the character minting costs SKILL, and the SKILL paid is returned to the reward fund address, but you can only have 4 characters per account, so this is a rather minor contribution. Second, weapon minting and reforging works the same as character minting, and because of the way weapons work this will be the major contributor to keeping the reward fund address topped up. However, even weapon minting does not last forever. Just because you can own as many weapons as you want, that does not mean you want to. In fact, you only need a single weapon per account. Surely, farming for that perfect weapon takes a lot of dice rolls, but once you have it you are pretty much done. This basically means that CryptoBlades is entirely dependent on new accounts being started, and new weapons being farmed continuously. In other words, they need to up their endgame.

A critique is not complete without a suggested solution, so I will share my thoughts about what I think CryptoBlades could do to alleviate their endgame issue. The flaw in their money sink stems from weapons being eternal. I suggest changing the durability mechanic on the top tier weapons to not replenish automatically like it does now, but rather require a “repair” that costs SKILL. Another idea is to implement an aging mechanic on the characters so that at a certain level they start growing weaker, eventually becoming useless so they are forced to retire. That said, my assumption is that implementing both of the above ideas probably would not be enough. Their economy is bound to fail unless they change their approach entirely, because they are essentially trying to make a perpetual motion machine. I predict that one day we will simply be unable to harvest our SKILL rewards, because the reward fund address ran out of SKILL.

This post was written based on information from the CryptoBlades wiki and my experience with the game, please let me know if I have erred. Even for such a simple subject I was not able to cover everything in a single post, but I tried to include the most relevant points to provide context for my thoughts. I don't really want to spread FUD or anything, but can anyone explain to me how this could actually last?

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PancakeSwap: More or less ponzi than fiat?

TL;DR: CAKE is indeed inflationary, but much less so than fiat. PancakeSwap appears to look solid long term, but as anything on BSC, it hinges on Binance not engaging in game breaking shenanigans. 

1. PancakeSwap is no doubt the most popular DeFi platform on the Binance Smart Chain(BSC) right now, but their pools and reward schemes present APRs that may seem a little too good to be true. In this post, I will try to explain how PancakeSwap could remain profitable, and how it could collapse entirely. This is not a shill post, and of course it is not financial advice either. If you already know how PancakeSwap works, you could skip right to the 7th paragraph.

2. First, to understand the gist of how PancakeSwap works, we will take a brief look at its history. It started as a Uniswap clone on BSC, which means an AMM platform where people can provide their assets as liquidity in return for a portion of the trading fees. However, PancakeSwap goes one step further, and provides staking pools and yield farms. They have also been adding more features later on, like a BNB price prediction game, and a lottery, slowly building themselves somewhat of a casino. They have their own token called CAKE.

3. It feels a bit weird to call the PancakeSwap staking pool “staking”, but I will roll with that terminology for lack of a better word. With occasional exceptions, the staking pools on PancakeSwap let you lock up your CAKE in return for more CAKE, or some other token. The CAKE to CAKE pools are fed CAKE from the minting cycle, and are therefore eternal. The CAKE to TokenX pools are temporary, because they need an external source of TokenX. So, when the pool runs out of tokens to reward the stakers, the fun is over. This post is mostly concerned with the CAKE to CAKE pools, because these tie directly into the CAKE tokenomics. I mentioned there is minting of CAKE, and indeed there is. On every block, which for the BSC means every 3 seconds, 40 new CAKE is minted. Looking a bit at that number, our old friend DOGE comes to mind, but I would like to emphasise that both DOGE, and here CAKE, mint a static amount of new tokens per period of time, which means inflation rates decrease over the long run, as opposed to fiat where they just pump harder and harder to keep their rates up. Additionally, most of this freshly minted CAKE actually does not even enter circulation. At the time of writing, 10/40 goes to the staking pools, 9/40 goes to the farms, and the rest is burnt. 

4. Apart from the staking pools we also need to consider the farms. Farms also reward CAKE, but you need specific LP tokens to stake in them. These LP tokens are the ones you get when you provide liquidity to a trading pair. Important to note here is that when you provide liquidity you also get a portion of the trading fees. The trading fees are paid in whichever tokens you provided, and work completely separate from the farms. Not all token pairs have a farm, and some farms are only temporary, so apart from the impermanent loss that everyone is warning you about, some additional care is required when choosing which pair to provide liquidity for on PancakeSwap.

5. To summarize, PancakeSwap provides two ways to earn passive income. Just like Uniswap, you can lock a pair of tokens in a liquidity pool to earn trading fees, rewarded in those tokens. Additionally, you can stake the LP tokens you get when providing liquidity in a farm for additional rewards in CAKE. You can also stake CAKE in various pools for more CAKE, or some other token. But, doesn’t this just cause massive inflation in CAKE you say? Yes, indeed it does, and that is exactly what we want to look closer at next. 

6. To prevent hyperinflation of CAKE, PancakeSwap performs token burns, i.e. they remove CAKE tokens from circulation every week. To do this, they need to gather CAKE from the end users, which is naturally done through fees. Part of the trading fee that users pay when using the DEX is used to burn CAKE. This is also where the casino comes in. Through the casino, PancakeSwap generates fees that can be used to burn CAKE. When the fee is collected in CAKE it is simply burnt, but when the fee is collected in some other token they do what they call “buyback and burn”. Pretty self explanatory, but that just means they use whatever token they collected in fees to buy CAKE from the market, and then burn it. I only have a BBA, so what do I know, but my hunch is that this “buyback and burn” is rather effective because not only does the burn reduce supply, the buyback also generates artificial demand. However, this is the kind of system that only works as long as it works, so let’s remember to consider how it could stop working.

7. The most obvious threat to PancakeSwap is something happening to Binance. There is not really that much for us to do about that though, so I will just recommend everyone who keeps funds on BSC to have an escape plan that does not involve the Binance bridge. It is a rather unlikely scenario, but the consequences could be massive. Then there are hacks, rugpulls, or anything else that would ruin their reputation, but this is the same for pretty much any project.

8. Second, given the burn mechanism I explained above(6), PancakeSwap is reliant on keeping platform traffic up to keep inflation down. If the bear market hits and traffic drops substantially, the inflation could spike. With the market already on a downwards trend that could get nasty. 

9. Finally, CAKE as a token really only has one use, yielding more crypto. It also works as a governance token, but that is more of a secondary utility. Due to the way CAKE minting works(3) the APR on the pools is steadily creeping downwards along with the gross inflation rate. This makes staking CAKE seem like sort of a prisoner’s dilemma. A krill like me is not going to make a difference, but imagine a pancake whale suddenly deciding the APR has dropped too low, and deciding to dump his CAKE. This would of course cause the APR to rise back up, but if the price suddenly dumped notably this could cause FUD and panic selling, further dumping the price to a point where it is not able to recover.

10. In conclusion, PancakeSwap might not qualify as a ponzi, because your profit is not so much from the investors coming after you, but mostly from the users of the DEX, or the casino, both of which are legit products. In fact, the more value is invested in a pool the lower the APR gets, so from a yield perspective we would prefer people to burn all their CAKE on the lottery. 

11. If I have to make predictions, I would say that PancakeSwap is going to survive a bear market, if only because it is by far the biggest DEX on BSC right now. The price of CAKE will drop more than the average top 50 coin, but not so much that the pool APRs cannot compensate for the difference. They will see a new ATH at roughly the same time as BNB during the next bull run. Now I just need to wait 4 years to see how well these predictions are going to age. 

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No pressure though, I'm not starving.

Stakeable cryptocurrencies comparison

What are they, and what do they want?

In this post, I present a highly subjective ranking of Proof of Stake cryptocurrencies. My inspiration stems primarily from a couple of shower thoughts. The first being that Proof of Work is indeed unsustainable. Obviously, this is not an original thought of mine, but the more I think about it, the more it seems to be true. Whilst I do not think Proof of Work will die before I do, it feels natural to look for alternatives, which brought me to discover Proof of Stake. Again, that is not my idea, but it is a charming idea, so I will roll with it for now. My second thought came when my wife and I were looking at stock savings accounts, and I realised that the Bitcoin I have mined with my new GPU has even worse interest rates than the Yen in my bank account. Sure, Bitcoin is projected to rise in value, but the same is true for most cryptocurrencies. Rather than just sitting on the Bitcoin and then see how far it can rise, or converting the Bitcoin to Yen, pay taxes, then invest the remains in an index fund or the like to get returns, perhaps staking can be a good option. However, even if we look only for Proof of Stake options, there are still heaps of cryptocurrencies to choose from. That is where I had my third thought, that money for the sake of money is rather lame, so I would look at the story behind the numbers. Why are the cryptocurrencies here? What is their purpose beyond profits? Why pick this one over the next one? In addition, I will look at the staking process and its requirements to say something about how difficult, or easy, it is to stake your coins once you have them. This is a relevant question for a scrub like myself. One thing to keep in mind is that most, if not all, coins can be staked using staking pools, a solution that can circumvent most of the barriers that make staking difficult. However, I will not look at third party staking pool services in this post, rather I will consider the native staking options built into each platform.

Note that this ranking is not intended as a guide for those who are looking for the quickest way to get rich. Currencies are listed by their sense of purpose, and ease of staking. This is of course highly subjective, and opinions in this post are based on information from the different currency’s official web pages. Considering this is the internet, it is possible that the developers, or their marketers, are full of crap and do not even intend to live up to their promises, but this post is based on the bold assumption that they are decent people with the best intentions. With that in mind, on to the ranking.

1. Reddcoin

What is it?

Reddcoin markets itself as “the social currency”, and the idea is to integrate a tipping feature in social media platforms so that anyone can send a tip to anyone as a reward for a great post, or comment. To facilitate this microtransaction behaviour the blockchain has fast transactions of one minute, and low to zero transaction fees. The absence of both mining and transaction fees is compensated by a yearly inflation of 5%, with no supply limit. These 5% are distributed as rewards to the stakers.

How does one stake it?

Staking Reddcoin is as simple as downloading their latest software wallet, the Reddcoin Core Wallet, and putting some Reddcoin in it. First, the wallet needs to download the entire transaction history. This took my old laptop about 2 days, but uses surprisingly little disk space. Coins will “mature” 8 hours after you put them in the wallet, and the wallet will stake mature coins automatically as long as the application is open, and the transaction history is fully up to date. Keeping the wallet open uses very little resources, so one can stake on any device with a stable internet connection. A mobile wallet with staking functionality also seems to be on the horizon. If your wallet goes offline, it simply stops staking until it gets back online. 

Why this rank?

Reddcoin tops this ranking simply from ease of staking. Just download their wallet, add funds, and wait, it does not get simpler. Whilst still pretty much unknown to the public, I like that they have a clear niche, which could be an advantage over the many other chains that seem to compete on pretty much the same field. Another thing that counts positively for Reddcoin is that they are the only entry on the list that is upfront about their monetary policy, and how staking rewards are distributed.

2. Polkadot

What is it?

Polkadot is a blockchain that is interesting exactly because there are so many other blockchains to choose from. Simply put, Polkadot aims to be the connection between different blockchains. Through something called a Bridge, Polkadot is able to connect more tightly to external networks than blockchains normally are, which allows for richer interaction between the different systems. They also promote something called Parachains, more or less independent blockchains that run in parallel to their main Relay Chain, whilst sharing the security of the Polkadot network. This can be a great idea, because the security of a blockchain depends on the size of its network.

How does one stake it?

The Polkawallet, Polkadot’s official wallet, is a mobile wallet that seems to have all the functionality required to stake your DOT. One thing to note about Polkadot is that their consensus mechanism is not plain Proof of Stake, so the staking options might be a little different from other currencies. 

Why this rank?

Polkadot scores well on concept. If any number of networks do well, there will be a need to harmonize their interaction. If Polkadot can deliver on this promise, they should have a bright future. Also, full staking features in the native wallet count positively.

3. Cardano

What is it?

Cardano is a blockchain built on science. Whilst it is built on many of the same principles, and with a similar purpose to Ethereum, it aims to do better through more scientific methods of development, and more democratic processes. Their purpose is to make the world a better place, and to empower the many. Their currency, Ada, is much like Ethereum’s Ether, meant to be used with the variety of applications that will be built on the Cardano network. Additionally, since Ada is a stake in the Cardano network, it can be used to participate in votes on the future direction of the network. The issue for Cardano is probably how to distinguish itself from Ethereum. It puts a lot of emphasis on being the best, as in the most secure, the most reliable, built on the most well grounded theories, and so on. However, a layman like me has no way to tell if this is actually the case, I can just take other people’s word for it. So it seems to be a better version of Ethereum, but the question is whether the improvements will be enough to make up for Ethereum’s head start.

How does one stake it?

Cardano promotes two ways to stake your Ada. You can set up a Stake Pool, or join a Stake Pool. The easiest way is of course to join an existing Stake Pool, and both of the native wallets recommended on Cardano’s official site appear to have built in functionality to help you find a pool, and delegate stake to it. Setting up your own Stake Pool seems to be a somewhat complicated process, and staking on behalf of others comes with a certain amount of responsibility, but it is also possible to run a private Stake Pool just to stake your own coins. If you want to create your own pool, you might be incited by the fact that there is no lower limit on your own stake, the pool requires very little hardware resources, and there appears to be no economic penalties for going offline, apart from loss of potential rewards. Rather, pools are ranked on various criteria to promote the best performing pools, so if your performance is inconsistent you are likely to attract less stakers.

Why this rank?

Cardano is perhaps doomed to be compared to its older brother Ethereum, but at least on this ranking it comes out on top, much because the staking features seem a lot more matured. The low threshold for setting up one’s own Stake Pool also counts positively.

4. Binance Coin

What is it?

Binance is a big cryptocurrency exchange platform that also handles exchange from and to fiats. They have their own currency, Binance Coin, native to the Binance Smart Chain. It actually looks like they have two blockchains, the Binance Smart Chain, and the Binance Chain, not smart edition. On the smart chain, Binance Coin can be used with various apps that reside on the chain. As Binance is an exchange, their coins can also be used to pay for transaction fees on the network.

How does one stake it?

Binance has made a slight twist to the consensus algorithm, so that it runs with only 21 Validator nodes on the entire network. These 21 Validators are elected from the available Full Nodes based on who has the most stake in their pool. Setting up a full node seems to require some technical skills, decent hardware, and a minimum stake of 10000 BNB. The easier alternative is to Delegate your stake to an existing Validator. This seems to be a relatively simple process, available from several wallets, and the Binance official page has guides on how to do this. The only thing to keep in mind here is that staking locks your coins for a period of time, so you need to wait before using them for something else.

Why this rank?

Whilst Binance Coin seems very legit in isolation, it sort of just comes across as “we can do our own blockchain too” kind of exercise. The fact that they can might be some of the charm about cryptocurrency in general, but I just do not feel it on this one. Considering Binance is already pretty big their coin might be a pretty good investment, but for the purposes of this post they end up a little on the weak side.

5. Ethereum 2.0

This is sort of the elephant in the room here, but the list would not be complete without Ethereum. I say this because Ethereum is not really Proof of Stake yet, it still relies mostly on Proof of Work, but the transition to Proof of Stake started with Ethereum 2.0 Phase 0 in December 2020, and staking Ether is already possible. 

What is it?

Ethereum is actually a software platform that comes with blockchain technology and its own currency, Ether. The idea seems to be that one can create and run entire applications on the Ethereum network, and our imagination is the limit. This could for example be used to provide banking services to people who do not have access to conventional bank accounts, a noble goal indeed. Applications built on Ethereum pay a fee in Ether to give the network incentive to run them.

How does one stake it?

To stake Ether one sets up a Validator Node. In order to do that it is required to make a deposit of 32 Ether, and then perform various setup operations, by the looks of it the client is not plug and play. The recommendation is to use dedicated hardware, and that is somewhat understandable when they point out that the current blockchain requires about 400GB of storage, where they recommend SSD, and this is estimated to grow by as much as 1GB per day from now on. It is also worth noting that after the Validator is online you will receive penalties for going offline, roughly equal to the rewards for staying online. A final thing to consider is that the stake cannot be withdrawn before the current Mainnet has merged with the Beacon Chain, a process that is supposed to take place within a few years, but the date is not fixed yet. It is probably safe to say that running one's own Validator is not for everyone.

Why this rank?

I am tempted to say “unfortunately”, but Ethereum staking just does not seem to be for the masses, yet. Most people cannot afford 32 Ether, and their approach to pools is very hands off. Additionally, there is the fact that we do not know when we can withdraw our funds. In its current state I simply cannot recommend staking Ether, unless of course you are hellbent on sitting on them for years anyways.

Closing comments

As I explore more blockchains and currencies, I will add more entries to this post. If you have a suggestion, please leave a comment and I will take a look.