Leveraging Automated Market Maker for Decentralized NFT Valuation and Inflation Management in P2E Web3 Applications

Non-fungible tokens (NFTs) are increasingly popular in Play-to-Earn (P2E) Web3 applications as a means of incentivizing user engagement. However, the lack of a standardized valuation mechanism has led to tokenomic pressures, where ‘tokenomics’ refers to the monetary policies of coins or tokens, contributing to inflationary trends. We propose a method to mitigate these inflationary tendencies associated with NFTs in P2E applications, leveraging a contribution-reward model coupled with an Automated Market Maker (AMM) mechanism. Our method suggests that burning NFTs, which permanently removes them from circulation, contributes to managing tokenomics inflation. As a reward for this contribution, our method mints a compensation (CP) token as an ERC-20 token. To further enhance the CP token’s value, we propose creating liquidity pools with governance tokens within the AMM, where the CP token’s value is derived from the market-driven swap rate between it and the governance token. To illustrate our approach, we introduce a robust model integrating our valuation method for upgradeable NFTs, highlighting their potential and utility. Additionally, by comparing models with and without our method, we demonstrate the benefits of our approach in game-theoretic mechanism design. This approach incentivizes participants to align their strategies with governance goals.