Axie Infinity Pt.1 — The Beginning
Axie Infinity — the game that has been making headlines all over the world over the past few months. The game that changed thousands or even millions of lives. The game that is coined the pioneer of the P2E Metaverse space. But what exactly is this game?
Axie Infinity is a blockchain-power online video game where players buy, breed and battle their monsters called Axies against each other to earn in-game currency — called smooth love potions (SLP) — that can be exchanged for fiat or used to breed more Axies. Each Axie is a non-fungible token (NFT), a unique collectable that can be bought/sold across marketplaces outside of the game. To begin playing, players must own at least three Axies, to engage in battle against the environment (PVE) or other players (PVP). When I started exploring the game, a “meta” team costs roughly between $1000 to $1500 US Dollars; each Axie averaging about $300 USD.
However, the reason why Axie gained so much popularity was not due to their amazing gameplay or stunning visuals but rather, because of the economics of the game. At its peak, an average player could earn up to $1000/month from playing this game full-time. This was especially appealing to players from developing countries, e.g. Philippines, Venezuela etc., where this is actually a decently good living wage. This created job/business opportunities for both Scholars and Managers alike, especially during the peak of the COVID-19 pandemic.
Over the months, Axie Infinity’s player base continued to grow, as more guilds (e.g. Yield Guild Games, Good Games Guild etc.) were formed and more Scholars were hired. Axie saw a growth explosion, daily active users surged from 38,000 in April to 250,000 in June to nearly 3,000,000 today.
This situation inevitably caused hyperinflation of the SLP token due to the exorbitant increase in supply and the lack of burn mechanism present. This market imbalance has caused SLP to hit an all-time low of $0.0089 (at the time of writing this post). This has set off a domino effect on the game, with lesser players/scholars/managers wanting to buy/rent more Axie teams due to the low-profit margin.
The State of Axie’s Economy
Almost every game economy works similarly. When you have a product or service that has economic value — there needs to be demand from buyers and supply from sellers (econs101). Essentially, sellers want to make money by exchanging their resources (money, time, skills etc.) to create a product, while buyers pay to purchase these products from the sellers. Sellers supply the product and make money from it, and buyers pay the money in order to benefit from the product they have purchased. Therefore, the total amount of money paid by buyers should equal the total earnings of sellers.
Let's take a look at Axie. Imagine now that Axie Infinity is essentially an empty restaurant. Managers of guilds are the restaurant owners while the Scholars are the line cooks, waiters, cleaners etc. The Managers have invested time and money into the restaurant, hired workers and expect to get paid. The Scholars are “farming”, working hard and creating products and getting paid by the Managers. Here comes the problem, nobody is coming into the restaurant to eat — that means nobody is buying/paying for the products created. In simpler terms, people are joining and hoping to leave with more money than they had initially invested. Thus, the huge influx of new guilds, scholars and individual players. This worked at the beginning because the influx of new players each day/week/month was larger than the number of existing players. In this case, the new players are the buyers and existing players are the sellers, so the buyers are paying profits to the earlier players.
However, because the player base has grown to such an extraordinary size, the increase in the supply of Axies minted is not met with the same levels of demand from new buyers. As we can see from the chart above, the daily new Axie Holders is significantly less than the daily active addresses on Ronin. This is representative of having 300,000 workers in a restaurant serving, cooking and cleaning for about ~200 new customers a day. Ridiculous don’t you think?
Another huge issue is the hyperinflation of Axie’s in-game currency, SLP. Currently, the only real utility SLP has in the game is being used to breed Axies. More often than not, SLP earned by the Scholar is sold for fiat (to support their daily expenses); and for Guild Managers to Ethereum to either reinvest in the game or sold for fiat too. The matter of fact is that few want to continue down the Axie breeding path. Why? Because there is just too little to almost no demand for Axies at the moment. The marketplace is littered with Axies, the cooks keep cooking but there's just no one that wants to eat the food. We can see from the chart, the disparity between the SLP burns and mints, only about ~10% of SLP supply minted is burnt each day. This oversupply of SLP is damaging the economy and unfortunately, Sky Mavis has not provided a sustainable solution to fix this (not yet maybe).
Hyperinflation. Decreasing rate of player growth. Price of SLP dipping to ATL. These are all issues that cannot be fixed overnight, but it definitely needs to be resolved quickly. If you realised, all these problems are sort of interlinked. So much that it is creating a vicious cycle.
Hyperinflation → SLP Price dip further → Lesser New Players/Buyers → Demand for Axies decrease → Less incentive to Breed → Hyperinflation
So what do you think? Is Axie still bullish with all the upcoming updates or do you think that it's too late and Axie will probably be dead by then? Personally, I think, if done right, the game still has massive potential to grow. With the Land Gameplay and Origin coming soon, we might see a revival of the game.
Let me know what you think, while I consolidate my thoughts on all the interest solutions, that I have gathered from engaging with other Axie investors in the community, for the next part of this Axie Infinity Series. Cheers.
