Opening this post by invoking the dystopian Ready Player One would be a bit on the nose, not to mention overplayed. Still, I struggle to conjure a better way to introduce the phenomenon that is Axie Infinity.
You probably haven’t heard of Axie Infinity yet, but that’s just because you’re not from the Philippines, where its in-game cryptocurrency, Smooth Love Potion (you read that correctly), is currently being used as a medium of exchange IRL. It’s a world where the timely confluence of NFT’s, cryptocurrency, and an inventive play-to-earn structure with sound tokenomics enables lower class citizens of developing countries to earn a living by breeding rented avatars in the metaverse. If I read that sentence 5 years ago, I would have written it off as a soup of nonsense words. But, the reality is that times are changing quickly, and we can either ignore what is happening in this peculiar world we live in, or attempt to understand the fringe digital societies that are shaping corners of the globe with eyes wide open. Read on.
What is Axie Infinty?
Like many born in the early 90’s, I was once addicted to Pokemon. I collected the cards, played the video games, and watched the television show religiously (just for a few seasons). Hours of my youth were dedicated to “catching ‘em all” across several different media — and I have little regret for how I spent that time, even looking back as an adult, because I genuinely enjoyed it. I bonded with friends over the characters and story-lines, defeated countless hours of boredom, and nurtured my young imagination.
Axie Infinity is similar to Pokemon in several respects. First of all, the game centers around digital creatures with specific attributes that battle each other. Every “axie” has a distinct set of body parts used for attacking and an elemental affiliation — water, plant, bird, etc — that performs better or worse against specific other affiliations. Second, each axie has an owner who can opt to use it as part of a team of three to battle against other Axie Inifinity players or NPC’s (non-player characters, i.e. the computer). Where Axie Infinity and Pokemon differ is that everyone playing Axie exists in the same metaverse, and thus each axie is provably unique and owned by exactly one individual account. This condition is enforced by the mechanics of the Ronin blockchain, which is an EVM (Ethereum) compatible sidechain spun-up by the creators of Axie Infinity after Ethereum’s mainnet proved too slow and costly for their purposes.
As each axie is an NFT and hence provably unique, you might be wondering where they come from. Axies can either be bought in the marketplace sitting on the Ronin sidechain or bred in-game. In order to breed axies you must have axies to start with, as well as a mixture of AXS (axie infinity shards) and SLP (smooth love potion), both cryptocurrencies native to the world of Axie Infinity. However, each axie owned can only be bred a handful of times, and each time one attempts to breed an axie the more costly it gets in terms of AXS and SLP.
As previously noted, axies have different attributes, and the breeding process mixed with an element of randomness determines what traits are passed on to progeny axies. Since rare, powerful, and unique axies can fetch upwards of $2k USD, breeding is indeed a delicate art, and can also make playing the game with owned axies a profitable endeavor (more on this later).
Finally, the long-term vision of the Axie Infinity team is to create a robust metaverse, with a whole lot more to see and do besides axie-fighting. As such, they are working to improve the functionality of their in-game world called Lunacia, including building a toolkit to allow developers to let their wildest dreams come to fruition on owned plots of digital real estate. One could, for example, build a house, a storefront, a sculpture, or anything else so desired once this feature is enabled. To that end, land plots in Lunacia have also served as an intriguing conduit for speculation, with invdividual plots selling for about the same price as a suburban land lot IRL, which is anywhere from $10k-$50k depending on location.
Metaverse-onomics
So, now that we know a bit about the gameplay and some basic features of the Axie metaverse, it’s time to dive into why the rise of Axie Infinity is such a big deal: money. I’ve already mentioned the shockingly high sticker price of some of the NFT’s used in-game, like axies and land, but we have yet to introduce the economics of Axie Infinity’s in-game cryptocurrencies: SLP and AXS.
As mentioned, the appropriately named smooth love potion is one of the ingredients used to breed axies. Besides going to an exchange and purchasing SLP, players can earn it by completing challenges in the game — this is the essence of Axie’s play-to-earn (P2E) model. Interestingly, Axie’s P2E framework shares so much of the value the game creates that people are actually turning it into a full-time job, particularly in the developing world where the costs of living are low. For example, and due to the havoc wrought by the pandemic on economies worldwide, many in the Philippines have turned to Axie Inifinity’s in-game rewards for subsistence. At an approximate rate of 5 USD per hour for an average player, Axie Infinity has been a lifeline for people who have lost their jobs over the last year. In fact, so many in the Philippines depend on SLP that it is being accepted as a mode of payment by myriad local merchants. At the time of writing, the fully-diluted SLP market cap is $217mm.
Now, for AXS, or Axie Infinity Shards. While SLP is used in-game to breed axies and acts as a reward for playing the game, AXS bears more resemblance to an ownership stake in the metaverse itself. Specifically, AXS holders possess the right to vote on governance proposals about how to run the game, including decisions pertaining to the game’s rules as well as the reinvestment of resources. During its token launch, the Axie Infinity team created a community treasury, and stipulated that 4.25% of all NFT sales, including axies, land, and items, will be swept into the treasury. Since AXS holders control the treasury and nearly everything inside Lunacia is an NFT, they have an effective take-rate of 4.25% on all economic activity happening within the metaverse. Although profits aren’t explicitly being returned to AXS holders, they do own voting power over the community treasury. Thus, once more than half the token’s supply is in circulation, a market participant could theoretically drain the Axie Infinity treasury by purchasing a majority of AXS tokens. This condition should put a lower bound on the valuation of AXS and enforce that in the long-run the token’s market cap should track a DCF of the economic activity happening in the Axie metaverse. At the time of writing, the fully-diluted market cap of AXS was $19.3bn.
In the shadows…
The ability to log in from anywhere in the world and earn $5 per hour in a video game sounds pretty far out there, but the shadow economy sprouting up around Axie Infinity makes matters even stranger. You see, there is a catch to this money machine: to play Axie, you need axies. At the time of writing, the “floor axie,” or cheapest axie for sale, costs $157. Acquiring a team of three competitive axies, on the other hand could cost upwards of $1k.
Predictably, the disconnect between value-added labor and upfront funding has brought opportunistic capitalists into the mix. So-called “scholarship programs” supply successful applicants with loaned axies in exchange for a share of the income they generate. Essentially, purveyors of these scholarships buy some axies, find competent gamers willing to spend time leveling up and breeding their axies, and extract rents. The returns can be quite phenomenal: a $200 axie can be bred several times in a matter of months, generating an additional $200 axie with each turn (gross of breeding fees).
These arrangements do not appear to be totally in the spirit of the game, but they occur off the blockchain (“in the shadows,” as it were) and are therefore difficult to track or regulate. On one hand, they open up the world of axie gameplay to a wider cross-section of users than would otherwise be able to afford a competitive team. However, the view of axies as capital assets likely lured investors who otherwise have no interest in playing the game, and probably pushed up the floor price of axies to make them less affordable in the first place.
The most striking thing about these arrangements to me, and the reason I wrote this article in the first place, is to shed light on a trend that could have long term effects on the relationship between rich and poor societies globally. I do believe play-to-earn is a powerful paradigm and has the ability to do good for those who would otherwise have trouble making ends meet. However, the combination of play-to-earn and NFTs has opened a heavily financially engineered channel through which capital might exploit labor. Said another way, if one thought video games were addicting before, what happens when compensation is introduced? Yes, individuals who fell on hard times with the pandemic caught a break through Axie Infinity, but were they gaining any skills that would make them more competitive in the labor market over the longer-term, or were they permanently relegating themselves to the metaverse gig economy unwittingly? Furthermore, how do we deal with children playing Axie for rewards in light of child labor laws?
Following the money and value creation helps unpack why these questions are so important. Yes, Axie allows one to earn money playing a video game, but no, there is no free lunch offered, i.e. the money comes from somewhere. Essentially, paying players (those folks dropping thousands on axies and items) are driving the monetary incentives of the ecosystem. Who are these players? Frankly, I’m not sure, but one thing I can tell you for certain is they’re not poor. The tokenomics of Axie Infinity encourages low socioeconomic individuals from developing countries to jump in and basically entertain these paying players (because who wants to play against an AI, right?).
You might respond that the player-laborers are also being entertained too, and that if they earn some money while doing so then what’s the issue? Well, the recreational players can step away whenever they want to. The player-laborers, on the other hand, aren’t so fortunate. Instead of developing the skills they could use to truly advance their standards of living, they become trapped in the metaverse to serve as digital play-things for dilettantes from rich countries. This might sound hyperbolic, but anyone who can play Axie necessarily has a computer and an internet connection, and could have been taking advantage of online education to gain any number of skills that would have enabled them to start earning freelance work that would, in the longer-term, make them richer in dollars and probably satisfaction.
Where do we go from here?
The explosive growth of Axie Infinity offers proof of concept for P2E and I have no doubt we will continue to see this trend strengthen over time (Axie’s Discord server passed Fortnite’s in membership just this month!). This means that we need to think about the social, political, and economic consequences now. I imagine that the metaverse gig economy will have growing pains centered around the questions I posed earlier, just as the matter of Uber drivers as contractors seems to be a never-ending saga. I do think operating through a cross-border shadow financial system will make these issues of the crytpo-metaverse difficult for regulators to tackle. While I am an avid supporter of the crypto ecosystem as a whole and hope it fulfills its promise of upending the traditional financial rails which are undeniably archaic and unfair, the movement risks its own demise by rushing into novel economic structures that could be construed as opaque and exploitative. P2E is in early innings, and by taking stock of the potential pitfalls now we gain the best chance of evading any sort of Ready Player One-esque outcome.
I write about topics I find interesting in crypto. If you liked this article, follow me on Twitter @BasriRoss.
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