NFTs and the Metaverse — with Axie Infinity Cofounder Jeff Zirlin

Welcome back to the Harbinger VC podcast. Today we have a conversation with my old friend from college, Jeff Zirlin, who is one of the founding members of Sky Mavis (creators of Axie Infinity) and runs their global growth efforts. In short, Axie Infinity is a Pokémon-inspired universe where players can earn tokens through gameplay, and in a just few years has become the #1 Ethereum game with over $1bn token market cap. Today’s interview is spontaneous, but I had to get Jeff on since NFTs (non-fungible tokens) and the Metaverse are white hot conversation topics these days, especially after Beeple’s $69 million NFT sale and Roblox’s IPO. We cover Jeff’s initial foray into the world of crypto starting with Ethereum and CryptoKitties, which eventually led to Axie Infinity. We talk through NFT technology in practical terms… what ownership over digital assets enables, starting with collectibles and brand IP but moving into games and virtual worlds. In particular, Jeff highlights the strength of the Axie Infinity community. While Axie is a fun game, it has also created a social network (and jobs platform!) based on play to earn opportunities and community engagement across its players globally, from the US and Europe to Japan and Southeast Asia.

Edited by Henry Gao;

Podcast available via Spotify (here), Apple Podcasts (here), and more (search The Harbinger VC Podcast)

[Editor’s note: this interview has been edited and condensed for clarity. The opinions expressed in this article are Jeff’s own and do not reflect the views of Axie Infinity]

Getting into NFTs with CryptoKitties

Jeff, thanks so much for joining us, in hoc signo vinces. So… NFTs (non-fungible tokens) and the concept of gaming and virtual worlds have been white hot.

Jeff: In hoc. Thanks for having me, it’s amazing to be here! Yeah, NFTs are blowing up right now.

So Jeff and I were friends from undergrad (Yale). We were in the same fraternity, Sigma Chi. I recall back in the day on Sundays, we’d have these Sigma Chi candle passes and share what was going on over the past week. And now we’re on a podcast together, the worlds are intersecting.

I figured we start with your story. How did you get into crypto and NFTs? I recall you mentioned CryptoKitties was one of the earlier things that you did. Please walk us through some of that.

Jeff: Definitely. I’ve always been a collector of rare and beautiful things. I grew up collecting butterflies and fossils with my father, and I think that primed me for getting interested in digital collectibles. In university I studied military and economic history and I was really interested in sovereign debt restructuring. That’s actually how I got into crypto, because I was looking at the sovereign debt levels across the G20 countries and realized that either defaults or massive money printing was coming. That’s how I started getting interested in crypto, but I was only interested in it from a macroeconomic standpoint and as a speculator rather than as a builder or as a founder.

It wasn’t until I learned about non-fungible tokens through, as you mentioned earlier, CryptoKitties, that I decided that I needed to start working and building in the space. That’s kind of how I got into it and it’s been a wild ride ever since.

I recall you posting about CryptoKitties a couple of years back. I also recall a picture of you on Facebook where you’re speaking at a panel and wearing shorts. I can still hear in Albert and Inar’s voice “that’s classic Jeff” ha.

This also reminds me of another Sigma Chi brother, Alan Jiang, who’s currently the founder of Beam. He joined Uber in the really early days, and became very successful there. I recall he used to always ping us in the Sigma Chi groups and ask everyone to join Uber. In the early days, it didn’t make the most sense. Why would you join a taxi dispatch company? It didn’t really make as much sense as it does today… as is the case with earlier stuff coming out.

Back to you and CryptoKitties, can you tell the audience a bit more about what that is, what it was like before and where is it today?

Jeff: CryptoKitties was an early proof of concept. It wasn’t a long-term project by any means, but the cool thing was that it showed the potential for non-fungible tokens. There was an interesting community that developed around it and people within that community started to think, what’s the next natural evolution of this idea? And what does the future look like? So the thing that I’ve been working on for the last three years, Axie Infinity, is really an answer to that question and the evolution of digital collectibles.

We saw that NFTs could be potentially something to get non speculators interested in blockchain. Many of the original CryptoKitties players were gamers or collectors who were using the technology for the first time. We thought that if we got interested in blockchain and actually using it for the first time because of this very simple application, we must be just the first generation. This has a lot of potential to be a catalyst for introducing everyday consumers to blockchain technology.

The feel I get with the latest craze of NFTs is that… it’s not necessarily just coming from folks within crypto, but more from folks who are buying their first NFTs from popular marketplaces. For the benefit the audience, we’re not going to go through crypto and blockchain in detail. We’re not going to go into the technicals of how blockchain protocols or validation work. But just to level set on this NFT concept before we dive a little bit deeper, I’ll share my understanding of it.

Why are NFTs Revolutionary?

My understanding is that if you assume that a digital asset, whether it’s an audio, image, video or whatever, if you assume that based on blockchain technology, this particular asset could be owned. It is immutable, you know its provenance and you can transfer it. If we assume that you can actually own a particular digital asset, then there’s a lot of possibilities that open up because of it.

I think the human desire to own things is very natural. If you can own physical stuff, great. If you can own digital stuff now because NFT technology, then there’s a lot of stuff that can be done. So you know, one of the things that has been blowing up over the past couple of months has been NBA Top Shot, which is built by Dapper Labs. That just made so much sense to me because in a physical world, people would pay a lot of money for a rare collectible baseball card or Pokemon card.

The cost of a cardboard for a card is super low, but you’re going to pay top dollar for some of these rare cards that you just really like and have this kind of emotion or feeling towards. It’s even further than that, it’s like having a bit of ownership over history, so to speak.

So that’s where we are today. NFTs to me almost feels like one of those aha moments.

Jeff: Yes. The total addressable market for something like Bitcoin…it is disrupting money, which is cool. But NFTs allow basically the tokenization of everything: game assets, art, even real estate and music. It basically allows you to own and tokenize and have true ownership for the entire universe of things that aren’t money.

I prefer to speak in stories. For example, Axie is basically digital pets on the blockchain. You can battle them and collect them. I grew up playing a lot of games and I was always trying to monetize my time in game, but I was never able to trustlessly sell my in-game items or resources. If I wanted to sell some of my game assets, I had to either use some kind of third party. Or we ran into the issue of like, okay I’m going to send you the item first and then you can PayPal me. You can get scammed.

At Axie, we have a smart contract which is like a digital vending machine. One party puts in the game asset, that game asset is stored in the smart contract, and then someone else can just buy it from the smart contract. Both parties are able to trustlessly acquire the thing that they want. So that’s one of the reasons that I believe that NFTs & gaming and NFTs & collectables make a lot of sense.

That is, at its core, what NFTs allow you to do, but I think what’s more interesting is…if you’re going to be asking me what’ll happen in two years, it’s going to be the tokenization and allowing every application to actually be owned by its users. So that’s another layer of how blockchain gets used in our project. Axie Infinity itself is worth over $1 billion, but the company Sky Mavis that’s building Axie Infinity is not actually a unicorn yet.

Why? Because we (Sky Mavis) only owns 20% of Axie infinity. This is a new paradigm, a new approach where the people who build these applications will only own around 20% of the products that they build. The other 80% or so will be owned by their communities. This basically creates a hive-mind effect where the users are owners and when users are owners, they evangelize, they do marketing, they build things on top of the product. It decentralizes, not just like people talk about decentralization of data storage, but I think decentralization also applies to the ownership of projects. I think that’s also going to be a key narrative for why gaming makes sense with blockchain, aside from just NFTs and collectible and tokenization of these games.

Axie Infinity

Got it. So I know a bit about Axie because we talked before, but just to step through a couple of things for a broader audience. You mentioned that the players themselves own the majority of what is Axie Infinity. Are you referring to the NFT value of the Axie themselves, or some of the other tokens involved with that broader community? What are the gamers owning and why are they so incentivized to keep doing stuff?

Jeff: So in Axie, there are many different things that gamers can own. They can own the actual pets themselves (the Axies). There are also lands and plots that basically are pieces of the universe. In the future, people will be able to build experiences on top of them, build cities and things like that. But there’s also something called AXS, which is a governance token, a piece of the game. In the future, all of the marketplace fees and the breeding fees that had been going to Sky Mavis, the creator of Axie, will be going into a community treasury and that treasury will be governed and controlled by the people who actually own the token. Sky Mavis itself will only have around 20% of control over that treasury.

The way I understand it is that there’s a number of these assets in a game that are NFTs, right? The Axies and pieces of land are NFTs. The AXS you described is not NFT; it is a separate token, a governance token that distributes the fees or value that’s generated in the entire ecosystem. That is not controlled by sky Mavis, the game producer/developer, but by the folks that are playing.

Just to go through Axie a little bit further. In terms of the game, if a user want to play, they should buy some Axies, so I guess that’s revenue to you. But if a user wants to trade his or her Axie in the marketplace, a percentage of that goes to you as well. That is the marketplace fee you’re referencing?

Jeff: Yes. In the last month there’s been $10 million of volume of NFTs sold on our marketplace. 4.25% of that gets taken as a fee. Right now that goes to Sky Mavis, the creators of the game, but starting later this year, that will actually go into a treasury that’s governed by the community.

Got it. So that’s another source of fees. And then you said there’s “breeding”. How does a breeding fee work?

Basically, the only way right now to create more Axies is for users to breed Axies that they own. So in order to breed axes, they require some potions as well as a fee based in Ethereum that they pay. That’s also a pretty significant source of funds. One of the things about Axie is that we need the Axie population to grow fast enough to accommodate new users, but it can’t be growing out of control that the value of Axies just go to zero. It’s a balancing game where we set a goal of what percentage user growth do we want this year and what do we think is also achievable, and then we can basically project/target a certain level of Axie population based on that. So let’s say we wanted 1 million Axie players. Each player needs at least three Axies to form a team, so we know that in order for that to happen, we need to have at least 3 million Axies. So we become like a central bank within the system where my background in monetary theory and central banking comes in. But in the future, that could be one of the things that’s actually governed by the treasury or we could set up a formula.

Okay. So there isn’t a finite amount of Axies in play. You’re essentially issuing or creating new Axies over time that matches the demand. It’s kind of similar to NBA Top Shot where basically every season there’ll be more games and more moments, so you would be creating new NFTs of new moments for NBA Top Shot, but actually you’re creating new Axies. But the value of the Axie is based on supply and demand, even though there’s more Axies being created, there’re also more buyers that are coming in and pushing up the price of the Axies. Assuming that is how things are going on it’s quite important for you to not flood the market with too many Axies so that it’s not scarce anymore. Is that how it works?

Jeff: Yeah, that’s generally how it works. Right. Also one of the reasons that Axies have gone up in price a lot is that you’re actually able to earn different tokens by playing the game. So they are getting priced based on like the potential “yield” that you can generate by using them in the game.

One of the difference between Axie and a traditional game is that the markets for not just the in-game items, but also the in-game resources are controlled by players. So if someone wants to breed Axies, they will need a bunch of potions. And if they don’t have enough time to play the game to get that amount of potions, they’re going to have to buy that amount of potions and the only way for them to get those potions, other than playing the game, is by getting them off of an exchange like Uniswap or even Binance.

This is going to be the future where by giving the players control over the entire in-game economy, not just with NFTs but also with fungible tokens, you give control to the players, then the game won’t even need a marketing budget because people are getting paid to play the game… by the whales or the collectors who are subsidizing the in-game economy, because they want a lot of the in-game resources.

I see. So basically the game players themselves are incentivized to play, not just for fun, but because they can make money?

Jeff: Yes, it’s called it’s called “play-to-earn.” One of the amazing things about Axie is that it’s the first play-to-earn game. We’re definitely a pioneer in this. In the Philippines, in Indonesia and Venezuela, there are villages where the majority of the people in these towns are playing, even grandmas and little kids are playing Axie. It’s making a huge difference. Part of what we’re trying to do is build and scale so that we can change even more lives and help even more people.

Got it. So with the potion and AXS tokens, the folks that play generate some of that and sell it. In Philippines or Indonesia where the local salaries are quite low, is the revenue generated by the game higher than what they typically make?

Jeff: Yes, it’s about 4x the minimum wage. Also keep in mind that most people play mobile games despite the fact that they already have a job. I wouldn’t say it’s replacing a job, but it can be a nice little extra side income. In some cases, these people don’t have jobs in the first place, so it gives them dignity of work. This is a market-based solution to the concept of UBI. I think games are really important part of the future of work, because we’re seeing physical jobs being destroyed. Some people described Axie as a blossoming digital nation that has no boundaries or borders. Everyone is allowed and we’re seeing these people immigrate into our universe.

NFTs and the Metaverse

Very happy to hear that some of these people are able to generate real livelihoods playing Axie. That’s a really cool concept. You mentioned something that’s a very powerful trend of a virtual gaming world, so called “metaverse”. Everyone is talking about it now. Roblox went public recently and went up like a rocket to worth about $35–40 bn as we speak. They have extremely high usage. A lot of younger teenagers, 8 to 13 year olds, are spending more time in Roblox than anything else, whether it’s YouTube, Facebook, Instagram, etc. When they play Roblox or enter these virtual worlds, it’s not really playing a game; they are kind of going to that world.

So that’s definitely seemingly happening. I’m not sure how much of it is due to COVID. It’s probably a driver, but that trend was happening already. So now applying it to your world, where people are making money in this virtual world, but now you’re also throwing in the NFT, so I think that’s very exciting. I haven’t quite figured out like how things will look moving forward. That’s part of why I wanted to talk to you because you’re at the intersection of not just crypto NFT, but NFT plus this virtual world movement, gaming and everything else.

Can you like help us understand a bit further in the metaverse virtual world-type concept? How is NFT used? You gave a few examples of trading items, but what are some other ways NFT could be used in a so-called metaverse?

Jeff: Definitely. One of the popular trends or themes that we see recently is the lands within a theoretical game or theoretical metaverse being represented as an NFT. That’s one. NFTs are so broad. You could tokenize the soundtrack of a game and represent that as an NFT. What we’re seeing is that virtual worlds are a trend, NFTs are a trend. If you put them together, you basically get a digital nation.

And I think one things that people perceive as holding back the emergence of a metaverse is AR/VR technology. People expect it to be something that’s in their face and something that they can move around in and perceive as the natural world. But I don’t actually think that that’s necessary or necessarily how it’s going to come about. With Axie, what you see is that the core ingredients are property rights, being able to transact with anyone anywhere.

Community owned game is also the future. Even in Ready Player One, there’s this idea of giving away the game to the users, a winner-takes-all kind of thing. It’s not corporatized; it’s very community and grassroots driven. Ready Player One was about the conflict between a very corporatized future and a community grassroots future and the interplay between that. So I think grassroots community-owned is going to be a characteristic of the metaverse with the property rights. NFTs are just one of the tools for giving full property rights to your players. It’s very social, right? Right now people are using Discord. In-game chat might be big, but Discord also could serve the purpose.

So yeah, those are the main things that I see as necessary for the metaverse, rather than this immersive VR world. Some people might be dogmatically attached to that based on what they’ve seen in movies or read about in science fiction or something. I think we will see awesome stuff like that in the future, but that might not be a requisite.

I see. I agree with that. For example, games like Minecraft or Roblox, folks are spending a lot of time in there without AR/VR. Some of those experiences are even fairly basic, albeit it’s for kids. Okay that makes sense, although I do have a question that you probably get a lot. If you have a virtual world, I mean, isn’t it kind of easy to spin up limitless virtual worlds? If that is a case, why does someone want to own a piece of land in one of these virtual worlds? Isn’t the volume or supply limitless and as such, the value should be low?

Jeff: I think just like anything, you have to pick your projects and what you get exposure to and who you associate yourselves with. We talked about how community being grassroots and community driven is very important. If you want to be a part of the best metaverse, you want to find the best community. So that’s why with Axie, we build the plumbing and infrastructure that makes a blockchain game or an NFT game possible, but we’ve also realize that we need to start our community building really early.

One of Bitcoin or Ethereum’s advantages is that they started really early before it was about money and they were able to attract a lot of people who don’t care about money and were in it for the mission. Right? The problem with starting an NFT project right now is that you get a lot of people who are in it solely for the money and not interested in the long-term mission. A lot of people joke about it like being in it for the technology. It’s not necessarily about just being in for the technology, but having some kind of long-term vision that people are aligned with and for your user base to understand that they’re part of a movement. I think that’s really important for these community driven protocols.

Game Interoperability

One more quick question about NFTs in these gaming worlds. So I keep hearing from people that NFTs are useful in games because if you have an in-game item like a weapon or armor, and if you have a NFT affiliated with that, then you can use it in another game. It’s supposedly interoperable between games. That’s kind of cool in concept, but I was wondering how do you think about that? What is the mechanism for that to happen?

Jeff: With Axie, we have never cooperated with another gaming project and seen that actually help us grow our user base or do anything interesting. It might just because it’s too super early. What we’ve seen as being more important and more interesting is that because Axie is on Ethereum, our users have basically one wallet which allows them to also use others Ethereum smart contracts.

When we launched our small love potions and said, this potion can be ERC 20, it will allow you to trade it. But then our players realized on their own that they could then create a liquidity pool for that token on Uniswap, which is a permission-less decentralized exchange, then all of a sudden there was liquidity and a market for this potion and we don’t even do anything. I think that’s one of the cool things that we’ve seen, having our users seamlessly interact with these financial protocols that basically creates this financialization of our in-game economy. All that being without us having to build that exchange ourselves.

Another thing is that with Axie, instead of horizontal interoperability, we believe in vertical interoperability, which means that our players and anyone else can build other experiences on top of the Axie assets. Right now there’s a battle card game. We’re also building a land-based game. There’s also potential to build other games, right? Mini games, for example. If you have one Axie and you can use that Axie in 10 different games, does that actually add a lot of value to that Axie because you can access all these different experiences, all using the same asset? Our hypothesis is yes, it does add value to that asset.

That was actually one of the reasons that we wanted to build Axie. Trung, an entrepreneur from Vietnam, and his childhood friends were the original founders of Axie. Basically, Trung thought originally about building on top of CryptoKitties. As a community member, he could potentially build on top of it. But instead he decided to build Axie as basically the ultimate thing that he, as a developer, would want to build on top of. So yeah, user generated content is a huge part of our long-term vision.

I’m somewhat bearish on horizontal interoperability, which is other games using Axie assets. Although it’s happened, it’s never really had an effect. But I’m bullish on vertical interoperability, which is us and our community building more experiences and baking those experiences into the existing Axie assets.

For me, [horizontal interoperability] would be almost kind of like a marketing thing. For example, if there was a game that was a lot bigger than Axie and we wanted to engage their users, then we can be like, “you can like trade your NFT from that game for something in our universe.” All of a sudden you can try to engage with their users. Some people think of it as a bridge, but I think of it as a weapon, potentially.

That’s really fascinating. Even beyond that, Axies are so darn cute, so I suppose you’re building a brand new IP in general. If you have a super strong brand IP around a game that you created and you have all the rights, then there’s plenty more you can do as well. So it sounds very exciting. There’s a lot of stuff that would come out of this!

We’ve touched on many of the key points in this quick conversation. Was there anything else you’d like to share with our audience today?

Jeff: Yeah, if you’re interested in learning more about Axie, definitely come to the Axie discord. That’s discord.gg/axie. You can also find us on Twitter. Sky Mavis, the Axie developers, are hiring right now. We’re looking for amazing builders and communicators. Prior experience with crypto is not really required. We’re looking for people who are very product and user focused and interested in helping us build the future. Check out skymavis.com and find some open positions there as well.

Ideally, our product and engineering hires would be able to relocate to Vietnam. There’s possibility for flexibility there. Our growth and business hires work remotely. I work remotely right now, so that’s definitely possible.

Crypto is an amazing industry, because it allows anyone anywhere to deploy any product that they want, and deploy to a global user base. Ethereum is a global currency. Bitcoin is a global currency. One of the characteristics of blockchain protocols and projects is having these blends of global citizens. That’s also one of the things about Axie…Physical location is such a burden. There are some people who just want to meet anyone anywhere in the world that share their ideals and ideas. I think that’s one of the reasons that crypto is inherently viral and has been growing and just never goes away, because it connects global citizens together in this shared movement.

I totally see that. It’s super valuable and a big enabler for a lot of people and families. Jeff, thanks so much for sharing more about Axie and also your own experiences. A lot of my learning about NFTs stems from you, so really appreciate your constant feedback and suggestions.

You got me excited about NFTs. Maybe I should create an NFT of you and some other speakers of Harbinger. It’s like owning a piece of history, with some of the great founders and investors that came out of this region. In fact, we’ll definitely do it, should be cool!