Axie Infinity’s Economic Engine
5 min readAug 10, 2021
Axie Infinity is experiencing exponential growth. What makes the game so special, and what risks remain? In this article we take a first look at the economic engine driving Axie Infinity.
Why is Axie Infinity special?
- Separation of Currency and Equity: Axie Infinity has separated the currency system (Smooth Love Potion, SLP) from the equity system (AXS, Axies, Land) in the game. This incentivizes players to both regularly spend the currency they have earned and hold the equity they have accumulated. This addresses the problem that many L1 or single-token protocols have, where speculation about future price appreciation hampers spending or using tokens in the present day.
→ Due to players earning in SLP and then cashing out to ETH or USD, there is theoretically a balanced inflow and outflow from SLP with no mechanisms to lock value in the token. In this manner SLP acts as a ‘currency’ with some degree of projected stability. Despite these mechanisms and a net inflation in the supply of SLP (see graph below), SLP has still appreciated in price significantly due to a surge in demand to play the game over the past months. However, in the long run SLP price appreciation should not be as strong as appreciation of the other “equity” incentives such as AXS.
- Accessible Wealth Building: Axie Infinity is a virtual land game competitive with Decentraland, Enjin, and others, but in addition has in-game mechanics that allow users to actively play to earn and build wealth as opposed to only benefiting from appreciation of assets (which is by definition more difficult to access if starting with little capital). In this way, Axie Infinity could serve as a wealth building on ramp to the broader cryptocurrency industry for millions of people.
→ Axie players have the ability to benefit economically from earning SLP, holding / staking AXS, holding / trading / breeding Axies, and holding Land in Lunacia. This multi-asset approach locks people into the game and provides an incentive to reinvest earnings into the game to hold more assets
→ See also Income Generating Assets, which provides an on ramp for players that can’t afford the initial fee to buy several Axies - Rebalancing Mechanisms: Adie Infinity has established a pseudo central bank that can adjust the “interest rate” (breeding cost, as one example, which was recently adjusted from 2 to 4 AXS per Axie to curb overinflation in Axie supply) to increase or decrease breeding demand and other variables at will based on measurable stock and flow. Additionally, built in inflationary and deflationary mechanisms (collectively, “rebalancing” mechanisms) mean that supply of Axies remains balanced.
- Income Generating Assets: Axie Infinity has a scholars program where existing players can lend their Axies to new players in exchange for a split of SLP (revenue) earned from playing with the lent Axie. This turns every Axie into an income generating asset provided there are enough new players that can’t afford or don’t want to pay the buy in for 3 initial Axies.
→ Note: current scholar programs are facilitated by third parties (typically gamer guilds), not by Sky Mavis or Axie Infinity directly. - Breakaway Position in crypto-based gaming and Play to Earn: Of mobile crypto games, Axie Infinity appears to have an overwhelming lead and network effects will continue to draw more users in at an accelerating rate. Additionally, in the Play to Earn category (as opposed to Play to Win and other variants) already emerging in the traditional gaming industry, Axie Infinity appears to have the strongest lead.
→ Daily Active Users have exceeded 1,000,000 as of August 6th, 2021
→ Axie Infinity is the first NFT game ever to cross $1B of transactions (sales) with more than 300,000 players actively trading
What are the risks?
- Daily active users, the metric many AXS speculators are relying on, are currently self-reported by Axie Infinity.
- The treasury distribution (token earnings) schedule put forward by Delphi Digital (the company that designed the tokenomics for AXS on behalf of Axie Infinity) is a recommendation and can be changed at the discretion of the project team. This means that future yield on staked AXS could vary widely from the current projection (see Tokenomics).
- Significant loss of DAUs and particularly new DAUs will cause downwards pressure across the game which can be temporarily averted by adjusting breeding rates and other relevant in-game operating costs, but (similar to interest rate adjustments) can only do so much. Thus, a swift decline in player interest could lead to a vicious cycle and a negative compounding effect on AXS price.
- The project team has central control over critical factors that act as checks and balances on in-game economics. An adjustment error, particularly as game economics become more complex, could significantly impact gameplay and token prices.
- Axie’s core team will retain voting control over AXS until at least 2023 and there are no plans to accelerate creation of a true DAO to govern the game or underlying smart contracts.
- Sky Mavis is planning on turning the Ronin chain into a full Ethereum sidechain with its own token, so that other games like Axie Infinity can be designed on top of it. Congestion, price instability, and other scaling issues could adversely impact Axie Infinity gameplay and therefore AXS price.
- Security of the Ronin chain is unclear at this point in time and accessibility (to pull relevant data, for example) is lower than Ethereum.
Additional notes:
- Axie Infinity is a crypto native game built by Sky Mavis. Sky Mavis is venture backed, with investors including Mark Cuban. The company has raised ~$9M in two investment rounds, which would suggest the majority of the company is still owned by the founding team.
- We found no evidence that revenue, treasury, or user metrics have been faked. However, we were unable to audit the Ronin chain directly (other than viewing the contract pasted herein that shows the current Treasury balance).
- Nothing in this article is financial advice or recommendation.
