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Are Cryptocurrency Games Pyramid Schemes?

by Eric Robertson 15 days ago in product review

The pay-to-win movement may be a house of cards

Aggressive click-bait title aside, the growth of crypto-gaming over the last six months has been nothing short of explosive. Axie Infinity is one game that has been central to this boom. At one point in July of this year (2021) they boasted more sales volume than OpenSea with almost 700 Million Dollars and upwards of 90 Thousand Ether. They now have a quarter-million daily active users and that may be an order of magnitude out of date in just a few months. How has their growth been so explosive?

In this article let's take a dive into Axie Infinity to uncover if this is really a sustainable venture or rocket about to run out of fuel.

What is Axie Infinity?

Axie Infinity is a game based around the breeding and battling of cute creatures called Axies. By breading two Axies you create a new Axie with some of the traits from its parents. Some traits have more rarity than others. These traits affect not just how they battle, but how they look as well. Each Axie is made of layering many different traits together to form a unique creature unlike any other.

Here the Axie’s traits are merged to create a new Axie with some of the parent's traits and some of the children’s traits.

And here, each Axie has a set of abilities, making it more or less useful during battle. A high-value Axie is generally one that has a good set of abilities and rare traits. For perspective, the going rate for an Axie on the marketplace is about $300, with higher values easily reaching several thousand.

For gameplay, you bring a team of three Axies to battle in a turn-based fighting game-style game. All of the ability cards you bring are shuffled into a deck, you draw them, play which ones you can, and then let the battle play out. The same for your opponent. Rinse, repeat, victory. For game modes, there is a single-player mode vs AI and a multiplayer mode live versus another player. Winning or completing daily quests will get you “small love potions” (SLP), which is an erc20 token spent to breed Axies.

There are promises for lots of expanded features including land, longer quests, more game modes. The developers have been very interactive and historically been hitting deadlines. But as of today, the game is as listed above.

The Play to Earn Model

The play-to-earn model is a new model for video games such as Axie Infinity. In it, rather than spending time and money for “nothing” in traditional games, players are rewarded with real, tradable assets for playtime. These assets then can be sold to other players, resulting in actual profit for players based on playtime. In Axie Infinity’s case, these assets are the Axies themselves and the underlying SLP token.

To get a sense of prospective profits, the SLP tokens are trading for $0.17 but prices fluctuate wildly, and a player can be expected to earn 100 SLP a day through quests and battles. Meaning the average expected income from SLP alone is often about $10 a day.

With breeding, on a typical breeding loop, you should expect to spend a thousand SLP per Axie and wait 5 days for it to mature. If it sold for $300 and you expect to spend $100 to $200 SLP to breed it, that’s another $100 per 5 days or $20 a day. It's clear to see that this can be quite profitable for players. Some report to earn upwards of $500 a day.

Now that is a lot of money, even in the USA. But the largest market for this game is not the USA but the Philippines. Due to exchange rates, even $30 a day can be life-changing. There are reports of towns in the Philippines where many shops accept SLP as a legal currency, allowing people to effectively fully live off the game and their Axies.

The Cycle of Money

Now, this whole thing poses a question, where is this money coming from? Simple. The money comes from people joining the community.

Small Love Potions (SLP) are valued because they allow the breeding of Axies. Axies are valued because they produce SLP through battles, but more importantly, they are valued because they are the gatekeepers to the game itself.

To play Axie Infinity you MUST have 3 Axies, which can only be acquired through the open market at market prices. Joining the game can easily cost $1000.

This is where we run into a problem. The game itself only seems to work when people are buying in. Each player must fork up $1000 to join, money that keeps the cycle running for other players who are trying to make money selling Axies.

Compare this to an imaginary game, let's call it Furry-Fight. In this game, furry little creatures battle each other for prizes just like Axies. But in this case, the game is free to join, providing you with a free set of three weak starter creatures (let's call them Furies) and all Furies created to stay within the game. How do the economics of this new game work?

Well, players of Furry-Fight gain some fun as they play and they spend their time, whatever their time is worth. If they value their time more than the fun, they can quit. In effect, the game itself creates value in the form of a fun experience and the players buy that value with their time and may be an advertisement or maybe micro-transactions or whatever. Not an original idea, but a proven one.

On the other hand, with Axies Infinity, players are spending money to play, lots of money, thousands of dollars. The system itself generates some value in the form of the fun of the game, but the majority of the value coming from the system is in the promise of earning money, someone else’s money, someone else who paid in with the expectation of earning money themselves. This is a classic Pyramid.

A simple search of “Axie Infinity” on YouTube shows how much the community is focused on earning and less on playing. Some channels advocate for Axies to be adopted as legal currency (???) or financial institutions to form Axie ETFs. Here are literally the first 12 video thumbnails to give you an idea.

Axie has grown 20x in 6 months and so far prices are rising. To maintain this, a year from now they need 400x the users, hitting tens of millions of active users, and a year after that they need the world to know nothing but Axie.

A step further, there are currently Axie “Internship programs” where people will rent out three Axies to a new player who can then use them for a time to make enough money to buy their own Axies. Some of these are free, but others are paid. People are paying to rent digital goods so they can buy their own at some point to then turn around and sell to a new player for an even higher price.

Clearly, this is unsustainable.

The Solution of Axie Infinity

So the solution here is not a crazy one, the game needs to move to a state where the value gained by playing is enough to tip the scales. Simply put, the expected value of playing Axie needs to change from “how can I use this game to make money from other players” to “this is a fun game I am willing to spend decent money in”.

This is not impossible, the developers are very keen on making this a reality. The next major update for Axie is set to include Lands and more token burning. Lands are tiles where your Axies can live and thrive, collect resources, craft, build, explore, and round out the game itself. The burning of tokens and Axies can also artificially reduce supply, allowing for higher prices and delay the time until the market collapses. With luck, the lands will expand the game to allow non-money-focused interactions, and future updates can be implemented to add more features further rounding out the experience.

Going steps further, imagine a future where the Axie world is not one of simple breeding and profit-maximizing, but a fully digital world to explore with your cute pet Axie. To get there though there are a lot of updates needed to build out this world, I believe the developers can build that future.

The Future of Axie Infinity

Now I’m going to do some speculating. This is what I predict will happen to Axie Infinity. This is all speculation, but ill lay out my reasons.

  1. Axie Infinity continues at its current pace for a month, adding a few hundred thousand more users. Prices of Axies spike and peak at some average price of $600 (as opposed to the $300 now). With current trends, this should be expected.
  2. The growth slows as financial trends and general market forces prevent it from growing without bounds. The people who bought in near the peak with the promise of huge returns see the slowing market and sell their Axies and act as signals for the general market. There are simply not enough people to continue at this rate for more than a year and the attention of the masses is a slippery thing, interest can simply not be maintained at these levels for that long.
  3. The market drops like crazy, crashing the Axies prices and slashing the SLP token from all-time highs. This starts the second wave of sell-offs, putting many people in the red and cutting the $500 a day that some players make down to $50. Prices will not go to 0, but a major sell-off will trigger lots of panic selling. Lots of the users are likely risking a lot of money and not willing to take large losses in general, so a small drop will be amplified.
  4. The game rolls out updates and hosts tournaments, increasing interest in the game, causing spikes in price but never reaches all-time highs again. Axies are not used as legal currency or adopted into exchanges, but SLP stays as a popular alt-coin for a few years. This game has promise and lots of good funding. There will be a future for it for sure.
  5. The game itself will still be played for years with a dedicated player base who enjoys the game for the game and likes the small profits their Axies bring, but the mania we see now is over. Axies cost $20 to $100 and SLP is about a couple of cents. Here the game is balanced and the buy-in cost is weighed against the community and interest in the game itself, not the possibility for exponential returns on investment.

Overall I am not saying that Axies can not and will not be a profitable venture. There are many people who are and will make good money off this game. What I am saying is that money comes directly from other players buying in and not from the value provided by the gameplay. Not until the majority of people play the game for the game itself will it be sustainable.

This is certainly a negative look at the game, and I know there are a lot of people who do not share this opinion. If you disagree I would love a response to this piece, interested in hearing more.

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This article was exported from my Medium Page here. I am putting it here to try out a new platform

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Eric Robertson

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