Decentralized Valuation and Inflation Control for NFTs in Incentivized Play-to-Earn Web3 Applications

Non-fungible tokens (NFTs) are becoming increasingly popular in Play-to-Earn (P2E) Web3 applications as a means of incentivizing user engagement. In Web3, users with NFTs ownership are entitled to monetize them. However, due to lack of objective NFT valuation, which makes NFT value determination challenging, P2E applications ecosystems have experienced inflation. In this paper, we propose a method that enables NFT inflation value management in P2E applications. Our method leverages the contribution-rewards model proposed by Curve Finance and the automated market maker (AMM) of decentralized exchanges. In decentralized systems, P2E Web3 applications inclusive, not all participants contribute in good faith. Therefore, rewards are provided to incentivize contribution. Our mechanism proves that burning NFTs, indicating the permanent removal of NFTs, contributes to managing inflation by reducing the number of NFTs in circulation. As a reward for this contribution, our method mints a compensation (CP) token as an ERC-20 token, which can be exchanged for NFTs once enough tokens have been accumulated. To further increase the value of the CP token, we suggest using governance tokens and CP tokens to create liquidity pools for AMM. The value of the governance token is determined by the market, and the CP token derives its value from the governance token in AMM. The CP token can determine its worth based on the market value of the governance token. Additionally, since CP tokens are used for exchanging NFTs, the value of the NFT is ultimately determined by the value of the CP token. To further illustrate our concept, we show how to adjust burning rewards based on factors such as the probability of upgrading NFTs' rarity or the current swap ratio of governance and CP tokens in AMM.