To be curious about the tiny Austrian town of Wörgl, you would have to be interested in the Great Depression, economic reform, or play-to-earn gaming. Lost in ancient annals, Wörgl played host to one of the most remarkable experiments in economic history in the aftermath of the Great Depression.

At a time when unemployment was skyrocketing, cities around the world were crumbling in economic depression, and public works projects were at a standstill, Wörgl was booming.

How? A simple, local-scale currency reform designed to stimulate economic activity, through which the local government jump-started the economy, fixed the town, modernised their railway, built a new drainage system, and even built a ski jump.

This forgotten currency experiment, called the Freigeld, holds valuable lessons for the world of play-to-earn (P2E) gaming. In recent years, P2E gaming has faced several challenges, leading many to declare the model dead. Too many games crossed the line from monetisation to exploitation; too many more fell victim to speculators flocking to their ecosystem in hopes of striking it big, only to sell the game’s reward token, thus crashing the price. However, the key to reviving this model lies in a well-designed token economy, as demonstrated by the success of the Freigeld in Wörgl.

Most play-to-earn games fund rewards by attracting new players, but this often turns these games into ponzi schemes, causing partakers to quickly lose interest. The key to creating a sustainable virtual economy is to provide compelling reasons for players to continue participating, while ensuring that cashing out poses no risks. To achieve this, the in-game token must serve as more than just a reward, but as a tool that is required to play the game.

P2E gaming has the potential to not just survive, but thrive.

Despite efforts by developers to implement clever burn mechanisms to stabilise game economies, many have failed to create a successful play-to-earn structure. The reason lies in a lack of buying pressure, as the incentives to buy an in-game token are not compelling enough. By revisiting the lessons of the Freigeld, P2E gaming has the potential to not just survive, but thrive, in the web3 era.

The idea of Freigeld was created in the early 1900s by Silvio Gesell, a German economist who wanted to fix the problem of money hoarding. In a healthy economy, people are encouraged to spend money due to inflation, which makes their cash become less valuable over time. However, in a stagnant economy, there is less inflation and people hold onto their money, which reduces growth.

Gesell’s solution was to introduce a tax on money holding. For this to work, there needed to be an exchange surcharge, strong asset backing, and effective distribution. Freigeld was taxed at a rate of 1% per month, with the currency stamped monthly to show that the tax had been paid. This tax, a form of demurrage, created pressure to spend, like inflation does, but in a more stable way.

Meanwhile, the Freigeld was backed 1-to-1 with the national Austrian currency, the Schilling. But whilst Schillings could be exchange for Freigeld at no cost, to convert your Freigeld to Schilling, citizens had to pay a 2% surcharge, encouraging people to retain and spend the local currency.

The city infused Freigeld into the market by initially paying municipal workers 50% of their salaries in Freigeld, and eventually increasing that portion to 75%. This allowed the currency to begin to circulate without forcing private companies to pay their employees in Freigeld. In doing so, the local government was able to stimulate its economy by encouraging spending, and resurrect its fortunes during a major economic downturn. Writing at the time, the highly influential American economist Irving Fisher reported favourably about the experiment, inspiring later initiatives like the Chiemgauer, which has operated in Bavaria, Germany, since 2003, and now has a money supply in excess of a million euros.

Lessons from Freigeld can be directly translated into a more sustainable P2E gaming economy. Wörgl’s experiment would only ever work at a local level, with a national currency to back it. But that is all a gaming economy needs.

To illustrate this, let’s lay out a potential in-game economy for a fictional game called Cloud Striker. The game will use a two-coin structure, inspired by the Freigeld and the Schilling. The two coins are: the in-game coin, $SKY, which is the equivalent to the Freigeld; and the gold standard coin, like the US dollar, which is equivalent to the Schilling.

Like Wörgl labourers, who were paid in Freigeld, rather than the Schilling, Cloud Striker players would also swap fiat currency for the local $SKY. That buy-in gives the player a starting amount of the in-game token to participate in the in-game economy, worth perhaps around $40, equivalent to many games on the market today.

The in-game token must serve as more than a reward, but a tool that is required to play.

Earning $SKY in the game would be possible through various actions as players progress. These actions include normal gameplay mechanics, such as receiving a bounty for defeating enemies. Additionally, players could earn $SKY for completing missions or side quests, a concept familiar to any gamer.

Details aside, even after earning initial buy-ins from players, one of the key challenges to creating a successful in-game economy is incentivising those players to hold onto or spend their tokens in-game. This can be achieved by making the token a requirement to continue progressing.

The key to creating a virtual economy is to provide reasons for players to continue participating.

In Cloud Striker, players could only progress in their campaign by using the in-game token. For example, after beating a boss and unlocking the next level, players must pay or hold a certain amount of $SKY to keep playing. This discourages players from selling their in-game token, since they’ll need it to keep playing. In addition, certain in-game abilities, status symbols, customisations, events, locations, or competitions, might only be available to players who accumulate a certain amount of $SKY, with other assets available to purchase, creating genuine demand for the token.

Meanwhile, a key aspect of the Freigeld was about encouraging people to spend, rather than hoard. This creates demand in the economy and keeps it healthy. To that end, Cloud Striker would adopt a stamp tax similar to the Freigeld, where players are taxed for holding $SKY for too long. Similarly, this creates a situation where players are incentivised to spend, purchase, and earn $SKY –– all without making the game a “pay-to-play” experience.

Gaming tokenomics need fundamental reimagining.

The final key to ensuring a stable in-game economy is to peg the $SKY token to an established currency like the dollar. This helps to prevent price fluctuations and ensures that players treat $SKY as a long-term asset, not as a speculative investment. Ensuring this stability provides confidence in the game and its economy.

In the Freigeld model, the local government profits from being a key part of the local economy, rather than from holding a currency that appreciates in value. This same principle applies to $SKY, as the developers should receive a portion of the taxes to cover their costs and earn a profit, while players earn through gameplay, not through the token’s appreciation.

Regardless of the tactics that developers adopt, gaming tokenomics need fundamental reimagining. The Freigeld experiment demonstrated the potential for alternative currency systems to drive positive change in communities. In the world of gaming, adopting these principles could not only improve the player experience, but also challenge the traditional economics of the industry.