Axie Infinity: The World of Smooth Love Potions & Fiercely Cute Pets.

Tech themes: web3, NFT, gaming, play-to-earn, metaverse, community.

Jan 17, 2022

Axie Infinity is a play-to-earn game that gives players the opportunity to earn in-game tokens and convert these tokens into a currency of choice. Axie has recorded annualized revenues of $1Bn+ with 2Mn+ active users. Sky Mavis, the developer, has raised a total of $161Mn, the last round valuing it at $3Bn. Whichever way you look at it, Axie Infinity is big business giving many their first glimpse of ‘working’ in the metaverse. Let’s dive in!

I still remember the hours of utter concentration I spent building ‘cities’ back in the day. Laying out roads and water pipes, balancing residential blocks with industrial ones but taking care not to put them too close, calming my dear citizens when they went up in arms protesting high taxes, you get the drift. Now if only I could have minted those cities and traded them in cryptoland, this humble writer may have today been a rather rich writer!

Why build cities when you can battle Axies.

Play-to-earn gaming though isn’t a get rich quick scheme, atleast not in its origin.

“This is my only entertainment. Sometimes I play 100 games. We hope Axie won’t go away. Even if it is little, we are earning from the game. It helps us pay for medicines”.

Meet Lolo Silverio and Lola Vergie, an elderly couple living in rural Philippines. They run a convenience store that made them 50-60$ per day pre-pandemic. The pandemic saw their income dwindle down to sub 5$ most days. Luckily for them, they discovered a game that helped them supplement their income.

“I graduated recently and I don’t have any work yet. Most of the companies here don’t need any employees anymore”.

And meet Howard, 22, who turned to play-to-earn gaming as a “job”.

These are grim stories to start an essay on what should be a fun topic, but they bring to stark light how new business models like play-to-earn can have far reaching use-cases - in this case a supplementary income and as a job alternative.

I will revisit some of these stories and the business models being built on top of play-to-earn gaming, but first let’s deep dive into how a game can make you money in the first place. Goes without saying, this isn’t career advice :)

All you need is some Smooth Love Potion.

So Axie Infinity is a blockchain-based game where you buy, breed and battle cute but ‘fierce’ pets called Axie. Axies are nothing but NFTs i.e. a block on the blockchain that is unique and hence has its own characteristics coded in along with a representative image.

Now here’s where this gets interesting - you need to buy a ‘team’ of three Axies to start playing Axie Infinity. I will come back and tell you how much that will set you back, but first let’s understand why many folks refer to Axie Infinity as a “chess-like game of strategy” rather than one of chance.

Axie Infinity is essentially a card game along the lines of Pokemon. Like Pokemon, each Axie has unique abilities in the game determined by permutations and combinations of different traits. The Axie’s class (i.e. beast, aquatic, plant, bug, bird etc.) along with various ‘body parts’ like eyes, ears, horn, combine to not just determine what your Axie looks like but also its strengths and weaknesses against other Axies. These strengths & weaknesses are captured by cards called stats along four dimensions: health, morale, skill and speed.

Since this isn’t a phD on Axies, I’ll stop here. The point being, if you have a team of three, you will choose strategically - the best combination of defenders and attackers that fit in your budget.

‘Battling’ these Axies (and winning) earn you Smooth Love Potions or SLPs. The reason these tokens are called “love potions” (I assume!) is because they are what you need to ‘breed’ two Axies together. The reason folks breed Axies is one of two (1) get a (strategically) better Axie that helps you win more battles (2) to profitably trade the new baby Axie. While this may be too much detail, you can breed Axies up to seven times, with every subsequent breeding requiring you to shell out more SLPs. So the first time you breed, you pay 100 SLPs, the second time it is 200 SLPs and so on.

But here’s the cooler thing about SLPs. You can sell SLPs themselves! This in-game currency is a fungible token that can be traded on crypto exchanges or converted to fiat currency of choice.

Summarizing the three ways one plays-to-earn on Axie Infinity.

Battle your Axie team, earn SLPs, sell SLPs to other players or convert directly to currency of choice, crypto or fiat.
Sell Axies, the ones you breed or even your own team, if and when you are done with the game.
And then there is a third. AXS sharding which I will come back to.

The Axie Infinity business model.

So, how does Sky Mavis, the company that created Axie Infinity make money? Two ways, the first of which is pretty simple. They take a 4.25% fee on Axies traded via their marketplace. The second, a bit more complex, they charge a fee when you breed Axies in the form of two in-game tokens: SLPs and AXS.

I have already discussed SLPs and how they work. AXS or Axie Infinity Shards are fungible tokens too but work a bit differently. Sky Mavis earns these tokens when users want to breed Axies, and users earn these tokens along with SLPs during gameplay.

AXS are a special category of tokens called governance tokens, which means that users who own AXS get voting rights on the future roadmap of Axie Infinity. These tokens are also used by the game developers to reward the community, for e.g. a recent airdrop of AXS to early adopters of Axie Infinity.

Remember I mentioned AXS sharding as a third way one can earn from the game? The way that works is that users who hold their AXS for a certain period of time rather than selling them earn additional AXS as rewards. This creates incentives for holding the token, and hence strengthens the overall game economy.

One can go far deeper into how this business model works and I will add some links at the end of this essay for those of you who are interested to learn more. For now, let’s summarize two ways game creators make money from play-to-earn games.

A direct fee on any in-game NFTs bought & sold via their marketplace.
Fees in the form of in-game tokens on certain actions within the game (in this case SLP and AXS for breeding Axies).

Scholarships for playing games. Why not!

The play-to-earn model to a great extent depends on new users entering the fray. And yet, that has its own hurdle. Axie Infinity requires you to first buy a team of three Axies to start playing - when I checked a month or so back, this was setting me back by $300 (today you can buy a team for about $120). Goes without saying, I did not take the meta plunge.

This entry cost barrier has led to the development of another business model on top of play-to-earn i.e. Guilds or coalitions of individuals and investors who come together to invest in game assets like Axies and then loan them out to people, called ‘scholars’ who want to play-to-earn but cannot afford the initial investment.

Yield Guild Games is an example. They own ~25k Axies which they loan out. Scholars keep 70% of in-game earnings, 20% is given to ‘community managers’ and 10% is kept by the guild. If we do a quick back of the envelope, a scholar can earn enough to buy her own Axies in 3-4 months (earn say $5 a day) which is when they graduate from the guild. For the Guild, it is a win-win, they earn from in-game tokens as well as from breeding. YGG is expanding across countries and has a local affiliated Guild in India too.

Why play-to-earn heralds a new era for gaming.

The earliest days of gaming saw many of us shell out money to buy a game title and then spend hours playing it. Then came the era of free to play which meant games were free but you had to pay to unlock levels and in-game assets. Free to play is big business, with popular games earning billions of dollars in revenues.

Play-to-earn flips this model around somewhat, sharing the value created and earned within the game with gamers. Own and breed in-game assets in the form of NFTs which you can sell, or convert in-game tokens to real cash. The concept of governance tokens like AXS is giving gamers real ownership, both in terms of upside from rising valuations as well as with voting rights on game roadmaps.

Games have always relied on the power and evangelism of communities that form around them. With play-to-earn and better incentives to play, these communities get supercharged making the game and its ecosystem so much more powerful.

In closing.

This deep-dive has given me a lot of food for thought. Here are some.

Looping back to the examples from the Philippines. For many, play-to-earn is a real source of income. Some like Harold treat it like a job. For him, the community managers are his bosses. But what happens when play becomes work? How do games like Axie Infinity ensure the ‘fun’ element is not lost? I suspect a balance between engaging gameplay, community and income will need to be struck. Good game design, not just incentive design, will continue to win.

Will many of us work in the metaverse in this decade? Axie Infinity gives us a glimpse of such a metaverse. They already sell virtual land parcels. Use cases are many - developers buying land to build their own Axie Infinity games, or metaverse real estate magnates renting out the land to others. Axie could collab with brands or other games for their characters to play within the Axie-verse. Could folks five years down the line be listing battling Axies in the experience or skill section of their CVs?
Play-to-earn games will make NFTs (and crypto) mainstream. 50% of Axie Infinity players had not previously used crypto, 75% were new to NFTs. What could other use-cases of NFTs be as the space explodes? What could other x-to-earn look like in the metaverse? I recently came across a startup on twitter that is bringing together brands and content creators in the fashion space. Creators earn by showcasing the brand's apparel on their digital avatars.

That’s all from me today, folks. The evolution of this space is only limited by imagination.

I hope you enjoyed this little peek into the world of play-to-earn gaming. Do share this post or a link to the newsletter with friends & colleagues if you found this an interesting read!

The 1-minute summary

Video games back in the day meant shelling out some money to buy a title and then spending countless hours playing. Then came the era of free-to-play which saw people shelling out even more money, this time to unlock levels or buy in-game assets. Game studios earned billions of dollars but hey, who minds when you get hours of entertainment. This decade though is seeing something very interesting happening in gaming - the promise of entertainment with the possibility of earning real money by playing.

Axie Infinity is a pioneer in what is being called play-to-earn. Valued at $3Bn and with annualized revenues of a billion plus, it is already big business. Simply put, you play a Pokemon like game, earn in-game tokens if you do well, and can withdraw these tokens and convert them to a currency of choice. It isn’t all that simple. To enter the game, you need to first buy a team of Axies, cute yet ‘fierce’ pets which are nothing but NFTs. The game which is often referred to as a ‘digital nation’ has a well-run economy. Sky Mavis, the game developers, earn every time you buy or sell an Axie and from fees they charge for ‘breeding’ Axies within the game.

Play-to-earn is much more than just earning while playing though. In many ways, it has reimagined incentives for gamers. Games have always relied heavily on gamer communities for their success, but these communities did not get much in return traditionally. Now with web3, gamers can not only earn for playing but also get governance tokens which give them a share in the overall value being created as well as voting rights on future game roadmaps. Axie Infinity has big plans with play-to-earn at its core. Virtual land parcels for sale, opening up of the IP for others to create Axie games and more. The bottom line: Axie Infinity is giving a sneak peek into the metaverse, into what playing and ‘working’ in the metaverse may look like. Gaming will never be the same again.

If you’d like to learn more about this space, here are some resources:

Axie Infinity marketplace: https://marketplace.axieinfinity.com/

Founder’s Field Guide with Gabby Dizon (YGG): https://www.joincolossus.com/episodes/45988185/dizon-mapping-the-metaverse-economy?tab=transcript

Business Breakdown with Sky Mavis: https://www.joincolossus.com/episodes/43695570/larsen-sky-mavis-the-builders-behind-axie-infinity?tab=blocks

Not Boring on Axie Infinity: