How the Mint Burn ratio works in P2E projects
We’re continuing our series on gamefi insights, digging deeper into play-to-earn tokenomics today. For the previous articles, check out Pay to Win in Web3 & Why Aren’t the Majority of Web3 Games Fun to Play?
What’s a mint burn ratio?
Looking back at the two token model, many projects have set the “earning” token with an uncapped supply. This is the token which guild managers and scholars alike collect in every claim period.
As players compete and earn these tokens, the number of minted tokens continues to rise over time, sometimes exponentially. Many projects have created ‘burn mechanisms’ which are supposed to counteract this expansionary minting process and keep balance in the circulating supply of tokens.
For example, my Axie Infinity team might earn 1000 SLP over the course of 2 weeks. If I use 700 of those SLP tokens to breed, then I have effectively only added 300 SLP to the circulating supply. However, most games run into the problem that the “burn mechanic” of breeding just delays an even worse scenario, but we will cover that a bit later.
The mint burn ratio is how much of the uncapped token is burnt in relation to how much is minted, usually represented daily in a graph.
Why is the mint burn ratio important?
To avoid hyperinflation of the “earning” token, projects must keep the percentage of tokens burnt as high as possible for as long as possible to avoid mass sell pressure on the market. Typically, when games are in their expansion and hype phase there is significant buy pressure on these tokens as new money comes in, because they need NFTs and a small amount to start expanding the breeding farm. However, when “new money” dries up, there becomes no real demand in the market to buy these tokens and the buy pressure slows along with the token price dipping.
At some point managers will need to take profits. While the mint burn ratio remains high, breeding is usually profitable but requires work to take profits, rather than claiming and just dumping tokens on the market. As breeding becomes less profitable and people become spooked by drops in token price (usually because of no new demand), the panic kicks in and people in the market sell the token, so they are not the ones left holding the bag. This leads to less tokens being burnt, more circulating supply, higher sell pressure and lower demand from new money as they watch the token price fall. We have seen this death spiral in P2E games many times over.
Once a project hits the point where the mint burn ratio gets out of their control, the death cycle of the token losing 99% of its value begins.
Strategies to keep the mint burn ratio in check
Most projects focus on breeding as their main “burn mechanic” when in fact all it does is delay the problem and make it worse further down the line. Breeding only delays the inevitable because the “burning mechanic” just creates an asset that will produce more of the token exponentially in the future. I would love to see projects implementing actual burn mechanics that target less overall net token minting. For example, repairs, entry fees, subscription models, and upgrades to characters/NFTs to name just a few. Web3 companies can look to successful Web2 games for inspiration.
This is another reason I was drawn to Wizardia, with their one token model and a capped supply which is substantially lower than most projects. This allows the team to focus on building a great in-game economy without having to worry about mint burn and use resources and time to plug the kind of holes we have seen in the sinking ships of many other P2E projects.
If you see the same potential in Wizardia, join me in picking up some Genesis NFTs for early investors at a nice discount.
ShillBill
ShillBill is a crypto enthusiast, gamer, and trader.
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