“Do you want to earn some serious money while playing a fun game?”

If someone asked us that even just a year ago, we would have played it off as a joke or asked if they meant we should start a streaming career.

But today, the average Joe can earn a viable wage playing games through NFT gaming, the most prominent of which is Axie Infinity - a game that takes inspiration from Pokemon with its owning, breeding, and trading mechanics, and card turn-based combat reminiscent of Slay The Spire and Hearthstone. The game is playable on both mobile and PC, currently available on Android with IOS coming in the future.

Recently Axie Infinity has come under attack by both new players and old members of the community. In this article, we hope to explore factors that affect the yield generating potential of Axie Infinity, its risks, and opportunities to outline why we are still optimistic. We hope to provide a brief overview of the game, scholarships, and current yields, then move on to discussions on our view of the future.

Some resources we found extremely helpful in familiarizing ourselves with NFT gaming and Axie in particular are: The Axie Infinity Whitepaper, “Infinity Revenue Infinity Possibility” by Not.Boring, and “Into the Void: Where Crypto Meets the Metaverse”, an in-depth overview of crypto’s role in the development of an open Metaverse.

If you are already familiar with the game please skip to Part 2!

If you enjoy this essay, please follow us on Twitter @terry15chung and @StingRayL0!

Table of Contents

Part 1

• What is Axie Infinity
  • The Crucial Tokens
    • SLP
    • AXS
  • Scholarships
  • The Future of the Game

Part 2

• Yields
  • Perception as a Game
• Risks
  • Issues with Long-Term Economics
• Conclusions

What is Axie Infinity

You will need 3 of these adorable cuties to start playing the game. They are NFTs that live on the Ronin sidechain. Axies come in all shapes and sizes, with different classes, traits, and genetics.

• The different classes determine the strength/weakness properties against other classes (think ice>water>fire etc…)
• The traits determine the attacks/moves an Axie has (each Axie has 4 moves) and its physical appearance
• The genetics determine the traits of a newborn Axie between two-parent Axies when mated🍆

Axies that have a higher number of traits that match their class (ex. Beast class with a Beast trait) are considered more genetically pure. Players can also intentionally breed different classes of Axies together to create an Axie with a variety of traits, as higher genetic purity does not always translate to better combat performance (genetic mutation can also randomly occur - resulting in a random trait not possessed by either parents). Axies can be bred 7 times but each successive breeding costs more. This is a brief overview, as the game is very complex, with lots of base stats, hidden boosts, combos, debuffs, and more to understand and learn. Here are some comprehensive guides to learn about combat or breeding.

The price of Axies are dependent on the current meta (the most effective tactic available based on current knowledge), their class, traits, genetic purity, the number of times they have been bred, and market conditions. Prices can range from as low as 0.005 ETH (aka floor Axies, with mismatched attacks and poor stats) to several ETH for highly competitive Axies with a unique set of traits. The average cost of a meta Axie at the time of this article, is around $300 (0.088 ETH), though depending on the type of team being built and the abilities desired, it is more likely that one will spend closer to $1200 (0.35 ETH) for a starting team. There are also rare Axies distributed early on in the game’s development called Mystic Axies that have unique appearances and traits. They are treated more like collectibles and are worth hundreds of ETH.

The Crucial Tokens

The game ecosystem is comprised of 2 important tokens: SLP and AXS. AXS is a multi-purpose governance token while SLP is currently a token required for breeding. SLP is also the main source of “income” when discussing the earning potential of Axie Infinity. It is also important to note that AXS has a limited supply while SLP does not.

SLP

Depending on the number of Axies you own on a single account, you get 20, 40, or 60 “energy”. Energy is spent every game you play (Arena = PVP or Adventure = PVE modes) regardless of victory/defeat and fully recharges every 24 hours at 12 AM UTC.

In Adventure mode, players battle successively harder levels which proportionally yield more SLP. By playing Adventure, you can level up your Axies to boost their stats which makes clearing higher levels - by extension gaining larger amounts of SLP in shorter periods of time - faster and easier.

In Arena, you battle other players. Levels do not matter here, as only the base stats of your Axie team are used. Generally, Adventure yields less SLP than Arena, as there is a cap of 50 SLP earnable per day playing Adventure mode. Meanwhile, SLP earnings in Arena are only capped by the amount of energy you have, the number of games you win, and the elo bracket you’re playing in. The higher elo bracket you are in, the more SLP earned per win.

There is also a daily quest that grants 25 SLP upon completion (as of season 18), which requires the player to win 10 Adventure games and 5 Arena games. You can keep playing after your energy runs out, but you won’t be earning any SLP in Arena or exp in Adventure (and SLP if you already hit the 50 SLP cap for adventure). SLP withdrawal is also only available every 2 weeks. The energy system and Adventure SLP cap are the main methods to limit SLP generation.

On the demand side, the SLP breeding requirement is currently the only utility of SLP. Breeders must burn SLP in the process of minting new Axies (creating new Axies by mating two existing ones). This counterbalanced with the two aforementioned supply-side dynamics are the main determinants of the price of SLP. As for the scaling of breeding prices an example may be that a virgin Axie breeding with another virgin Axie costs 600 SLP (300+300), while a virgin breeding with one that has been bred twice already will cost 1050 SLP (300+750). These breeding costs are (at the moment) arbitrarily determined by Sky Mavis.

Combining all that, the average player with a decently competitive Axie team can earn around 140 SLP a day with quite a significant variance between the best and worst players. The 140 SLP translates to $12.47, using the last-30-day average price of SLP of $0.08913.

AXS

As of right now, AXS functions as a token on top of SLP as a breeding limiter, but Sky Mavis plans to introduce staking rewards and voting governance.

Once staking launches, AXS holders can stake the token for 3, 6, or 12 months to earn more AXS at variable yields. Rewards will be claimable weekly but will be escrowed for 1 year before they vest. If the stakers provide value to Axie Infinity before claiming the staked yield (by playing the game or participating in governance), the staking yield on AXS could be higher or the wallet may win a special NFT drop. The number of votes cast or time spent playing that constitutes the minimum qualification for the extra payout has yet to be decided and will likely evolve over time.

There will be a total maximum supply of 270,000,000 tokens distributed in the following manner.

To support the future development of Axie Infinity, Sky Mavis has created a Community Treasury. This treasury will receive all revenues generated by Axie Infinity and a portion of staking rewards and will be governed by AXS holders eventually once the team determines that a “sufficiently” diversified set of wallets/holders have AXS.

Currently, the treasury receives 4.25% of all Axie marketplace transactions, and the AXS portion of the breeding fee.

In the future, other streams such as licensing fees, proceeds from cosmetic sales, tournament entry fees, and more will contribute to the Treasury. AXS holders in the future can decide how the funds from the treasury should be allocated and invested.

AXS has two main long-term goals:

• It rewards players for interacting with Axie Infinity incentivizing long-term holds
• Decentralizes the ownership and governance of Axie Infinity

AXS holders will have voting rights on increasingly important matters as the token becomes more decentralized - by October 2023, Sky Mavis will lose the majority position in AXS. Members will be able to vote on matters ranging from dates to host online tournaments to whether Sky Mavis should be replaced as the leading development team for Axie Infinity.

Note: This article was written prior to the launch of AXS staking on 9/30/2021. For more updated information please read their updated whitepaper, the staking guide, and the AXS staking dashboard.

Scholarships

Not everyone can afford the steep price tag that is required to start playing Axie while the earning aspect has attracted many aspiring players. Over 50% of the player base and people who express a desire to play the game come from the Philippines alone, with players also coming from countries like Brazil, Venezuela, and Indonesia.

To spend $1200 to purchase a team is 1/10 of the median annual salary in the Philippines, which is unfeasible for many people. What has emerged as an alternative is a partnership system called a ‘Scholarship’ where people who have Axie teams will lend them to others to play in exchange for a cut of the SLP earned. The renter is the ‘Manager’ while the rentee is the ‘Scholar’. The current standard is usually a 50/50 split, but with current SLP prices, people are still flocking to forums and Discord servers asking for a scholarship. Our scholars have told us that at times it is more profitable to be a scholar than work a minimum to even an average wage job in their countries, and many have also become jobless during the pandemic.

There are organizations like Yield Guild Games (YGG) that have invested millions into purchasing Axies (and other yield-bearing gaming NFTs) and are turning scholarships into businesses at scale. They manage thousands of scholars across NFT games and are building a community that will grow across the metaverse.

The Future of the Game

Lunacia

Axies aren’t the only NFTs in the game; Sky Mavis has built its own virtual world, Lunacia, and has sold tokenized land ownership. Moving forward, there will be game mechanics and rewards built around owning and playing on lands. Though the specifics have not yet been revealed, Sky Mavis has hinted that land gameplay will include PVE (player versus computer), a wider variety of monsters, material harvesting, and trading of said materials.

Lunacia land may also contain some pre-generated infrastructure like roads or bridges which can increase a land's value. Land value is also affected by its type and proximity to the center of Lunacia (the center is currently owned by Sky Mavis, and events are more likely to happen there). Landowners will have the first right to anything that spawns in their lands, but non-landowners will be able to participate in land-based gameplay as well (though in what capacity we do not know).

Landowners will be able to build different structures using the materials harvested on their lands to boost Axie performance or upgrade land functionality. Depending on the event, unique nodes will spawn randomly on the map. Players will then need to teleport their Axies to the nodes in order to participate in the events. After the event is over, Axies will need to travel across the land (which could take several days going from one end of the world to the other) to return home. This is how landowners can also generate revenue, as Axies traveling home on the aforementioned infrastructure could potentially drop AXS or NFT collectibles that landowners can redeem.

Items

There will also be NFT items to enhance Axie performance. Items will likely need to be crafted from Axie burning, monster drops, and material harvested from the land, or can already be bought on the marketplace. Both of these major game systems are estimated to be implemented earliest by Q4 2021 or Q1 2022, though delays will not be unexpected. Lunacia is part of Sky Mavis’ grander vision in building a strong community that will seamlessly integrate into the wider gaming Metaverse.

DEX

Sky Mavis also intends to launch a DEX for Ronin to become the #1 exchange for everything Axie related. The objective is to ease the barrier of exchanging AXS/SLP/WETH and lower transaction fees. On a similar note, Sky Mavis plans to create a Ronin to Ethereum Bridge for Axies so people will be able to send their Axies back to Ethereum if they so desire.

Opensource SDK

The aspiration to create an integrated ecosystem is reflected in Sky Mavis’ decision to create an open-source SDK for Axie Infinity. Other game developers will be able to create standalone games of entirely different genres (an open-world MMO where you play as an Axie or a tower defense where Axies are actually the towers?) while using Axie NFTs, the Axie marketplace, Ronin DEX, and AXS governance. This also allows Axie to live on for as long as the community, other studios, and individuals develop new content and use cases for Axies.

Sky Mavis’ ultimate goal for this game, is the creation of a household brand that can be leveraged into a stardom franchise with movies, books, theme parks, merchandise, and heaps more, just like its forefather and inspiration, Pokemon, did and is still doing today, but now owned by its community. It's a grandiose dream, but Axie Infinity has proven itself so far.

Part 2: Yield

In Q1 and Q2 of 2021, Axie Infinity underwent unprecedented exponential growth in DAU. Increasingly more people wanted to play and were met with a dearth of Axies. AXS rose 13,500% from 12/31/2020 to Q2 of 2021. Axie prices, which traced the single digits for most of 2020, rose to $600 for a meta Axie in July of 2021.

Since then as the acceleration of growth has slowed and an existing player base produces increasingly large amounts of SLP, the price of SLP has come down 80%+ from its all-time highs of 0.34 to 0.06 as of 9/26/2021. This has sparked discomfort from many scholarship managers and players, uncertain about the future of their yields and the viability of current income levels playing or lending out Axies.

And to a certain extent, the discomfort is warranted. At the moment, the only utility of SLP is in minting new Axies, making SLP only valuable insofar as new people want to play the game. In essence Axie Infinity at the moment is a yield farm whose token only has value because it can be reinvested for yield, denominated in itself. Yet, there is so much more to the ecosystem, different moving parts that affect the prices of SLP, AXS, and Axies. We hope to present a somewhat comprehensive discussion in the following section.

For those curious about manager APYs on Axie scholarships, please check out this spreadsheet that we created. Feel free to copy it and play around with different inputs.

Scholarship Yields

At the current average Axie price for an Arena competitive team (300USD/Axie), even if prices of SLP were to decrease 90% the yields on an Axie team will still be significantly higher than yields in traditional instruments and blue-chip defi. ETH deposit rates on AAVE and Compound are 0.02% and 0.14% respectively. On cefi, stable coin rates on USDC/USDT are in the 5-10% range.

Then why is it that either Axie or SLP prices are not correcting to stable and lower yields? It’s easy to relegate the disparity to an exponential growth of the player base resulting in substantially larger demand for Axies (and consequently SLP) than at equilibrium, yet, as we’ll briefly mention, there are reasons why this strikes us as only one of some primary reasons for the price mismatch.

We see three key barriers in price to yield convergence. First, the mental barrier of it being a game, second, opacity of yield stemming from opportunity cost, and finally some legitimate but mitigable concerns about long-term economics. Yet despite these concerns, of which the first and second we believe are insubstantial and the third mitigable, we are excited about what Axies will achieve in the long run.

It's just a game dude…

When first hearing about Axie Infinity, we couldn’t comprehend the thought of earning a wage from gaming. We first wrote it off as a scam, then debated whether it was pay to win, then branded it as a third-rate card game - mental gymnastics to help solve the cognitive dissonance we were experiencing regarding its earning potential. We vividly remember thinking - ‘This is the market top.’ - the first time we saw Axie prices.

As a veteran gamer myself who has played nearly every imaginable genre at all price levels, none made me doubt myself more than looking at a triple-digit price tag for a single Axie. While it's not unprecedented for people to spend thousands of dollars on games (look no further than the game that inspired Axie Infinity, Pokemon), what is unheard of is the insane barrier to entry of $1000+ to even start playing the game at all.

Let it work for you, not the other way around

“Games aren’t meant to make money! They waste both time and money!” - Dad

Look no further than the 177 billion dollars sunk into the gaming industry in 2020, the average Fornite player’s spend of $85 in 2018, or a League of Legends player who spent $119 in 2019. Even crazier, 85% of Fornite players spent money on the game in 2019.

For just a little historical insight, spending money on cosmetics and non-game-altering perks has not always been the norm. Back in 2006, when Bethesda released the 2.5 dollar horse armor in “The Elder Scrolls IV: Oblivion”, people lost their minds. People could not fathom putting more money into a game they already purchased, especially for a purely cosmetic purpose and certainly not for a single-player game.

Fast forward to today, $15+ battle passes and skins are the norm. The release of Seraphine’s ultimate skin garnered a lot of flak as people felt that Riot Games made the champion purely to sell skins, rather than actually add content and gameplay diversity. But I bet my Axies that the ultimate skin sold like hotcakes.

People are not used to games generating any material benefit. But like it or not, people do spend money on games. That it is a game should not hinder our perception of it as a project. And on the plus side, at least now my dad can’t say that I’m not earning money anymore.

Are there exceptions?

As of right now, there are only two mainstream ways to earn money by being an average gamer (no YouTube, account-selling, Esports, streaming, etc) discounting the Play To Earn model. One is gambling games, and the other is to participate in the grey-market economy of an MMO with a complex economy. Neither of which helps solidify gaming as a way to make money.

Expansive MMORPGs develop complex economies due to their sheer scale and the desire of its player base to create an online identity. Eve Online comes to mind when talking about an expansive and ultra-complex player-driven economy.

Eve Online is famous in the gaming community for being a ‘free for all social experiment’ type of game. The devs since the very beginning have reinforced the fact that short of causing legal issues and or completely breaking the game, they will allow anything to happen with minimal intervention. And that's how you get to creating a cyber-space tyrant manipulating thousands of players to do his bidding or a year-long galactic battle between multiple factions costing upwards of the equivalent of $380,000 in in-game currency.

But what this freedom also enables is a breathtakingly comprehensive economy that even real economists study. When this much time and effort is poured into a game, combined with a complex economy, people will naturally find ways to make money. Unfortunately, because trading in-game currency (known as Real Money Trading in the industry, or RMT) for fiat currency, or vice versa, is against Eve’s TOS and EULA laws, sketchy black markets have emerged offline to address players’ desires to be rewarded for their effort spent in the game and for people to take shortcuts with their credit cards. RMT players use bots or stolen accounts to farm in-game currency, which often is a lose-lose for all parties, as RMTers rarely get punished, law-abiding players end up having their account banned, the game economy balance suffers, and the dev team could still be liable for the transactions.

What we’re trying to say is this - if your first response to Axie Infinity’s yield generating capacity is to doubt its legitimacy simply by the fact that it is a game, know that it unleashes a two-decade-old pent up demand in a world where spending money on games is normalized.

Oh The Irony

Ironically, Axie Infinity being a good game may be hindering its perception as a yield-generating asset. Behind the innovative player economy, and hype, Axie Infinity is surprisingly and genuinely a fun game to play. We still sometimes reach for our phones and play several rounds of Arena knowing that we are not earning SLP as our scholars already consumed all the energy earlier in the day.

Take one look at a defi LP pool, and the first thing you see is the % APY. On the other hand, take a look at an Axie and that's usually not the first thought that comes into someone’s mind, especially if they haven’t been exposed to the game before and understand the numbers behind it. Even for someone who has interest in the crypto and gaming spaces it would be easy for them to be turned off by its high entry price as they are used to the free-to-play gaming environment we currently reside in.

This is why the argument that “it's a game, that's so sketchy” makes no sense to us. People already pour money into games, there exists a demand for real-world trading (it happens in opaque markets) and people want to own their in-game assets.

The Time Value of Money

Another issue with the direct visibility of the yield generating capacity of Axies is that for a first-time player, the yield produced is largely proportional to the amount of time spent playing and studying the game.

In Arena, each game takes approximately 5-8 minutes to complete, and at 0.08 SLP/USD, this equates to 2.7USD/hour to 4.3USD/hour.

At advanced levels of Adventure-mode, each game takes approximately 5-8 minutes to complete, rewarding 4-10 SLP per round. This puts your USD hourly earnings from Adventure mode at 2.4USD/hour to 6USD/hour.

However, to get to this point takes a significant time investment re-doing the same Adventure-mode levels to level up your Axies - levels that have low SLP yields. On average it took our scholars 10 days to get to adequate Adventure levels where achieving the 50 SLP cap was plausible within a decent time frame. But this was only possible after tens of hours of laborious, somewhat repetitive gameplay and even more research into the game mechanics.

For many around the world, the idea of a 10 day-long training session to earn 6USD/hour for an hour a day is incredible. More than 2.2B people around the world live under 10 USD a day and have mobile or internet access.

But for others, this is not a tradeoff they are willing to make and thus yields may remain opaque for longer than usual.

Other Risks

Besides the aforementioned reasons, why are yields on Axies so high? We believe there are legitimate issues in the Axie economy, and though they are regularly addressed and discussed in interviews and AMAs (we believe Sky Mavis is well aware and equipped for these problems) we wanted to aggregate them to provide a more holistic perspective of the long-term risks involved and the potential outcome of these scenarios.

Scholarship Risk

We believe yields on scholarships (200-300%) are high for a reason, though unwarranted for the particular risk profile.

First, renting is a manual process. Whoever owns an Axie team must create a new Sky Mavis account with a separate Ronin wallet and an attached email, and either give the scholar the login details to the account or send them a login QR code associated with the account every 14 days. This means that the scholar never has access to the Ronin wallet itself, and therefore cannot purchase, claim, breed, and sell Axies, SLP, or AXS. However, if the scholars are caught botting, playing multiple accounts, artificially changing the time on their devices to reset their daily energy, or engaged in other TOS violations, the Axies associated with the account will be banned and inaccessible for a period of 120 to 999 days (and it seems like they are getting pretty good at catching bad actors).

This makes it imperative that you pick the right scholar, though in our opinion at the moment this is not a large concern. The number of people who own Axies is significantly smaller than the size and growth of the group that wants to be scholars. Besides capital scarcity among those who most value Axie as an income source, this is largely because scholarships have incredible viral coefficients.

As managers, we constantly get requests from our scholars who have family members, friends, and coworkers who’d love to onboard. Anecdotally, our scholars have told us that they searched for 1-3 months before landing a scholarship. This means that for as long as playing Axie Infinity remains a viable source of income and global play-to-earn penetration is low, scholarships will remain very competitive, making the likelihood that someone is on multi-scholarships extremely low (though not zero). This issue will be more relevant as SLP prices, and the ratio of Axie owners to Axie scholars change with time.

Centralization Risk

Another key risk to scholarship yields is that currently, Sky Mavis controls the Axie economy. In the Season 18 update, having seen that the production rate of SLP far exceeded the SLP burn from breeding, Sky Mavis unilaterally decreased the SLP rewards gained from Adventure from 100 to 50 and the Daily quest reward from 50 to 25 SLP, effectively reducing novice players’ guaranteed SLP gains from 150 to 75 SLP a day. This however had no positive effect on the price of SLP.

It seems at the moment that because the AXS portion of the breeding requirement has been adjusted three times, doubled -> halved -> halved again (2→4→2→1), and because the SLP portion has been raised twice, that Sky Mavis has some sort of metric with which they target certain prices, growth rates or burn rates of these tokens. We believe that they are focused on maintaining attractive yields for managers and players by buoying up the price of SLP while ensuring marginal profitability of breeding to maximize the number of players who own Axies (and therefore are in the ecosystem), all the while ensuring the long-term sustainability of the economy.

How?

But what exact quantifiable measures Sky Mavis is targeting is not clear. In an economy with as many moving parts as Axie Infinity, any change to the existing ecosystem affects, either favorably or disfavorably, all stakeholders and prices of tokens.

The Sky Mavis team holds 21% of the outstanding token supply of AXS. Given this knowledge, we begin with an assumption that the team’s objective is to maximize the long-term price of AXS considering lockups (we acknowledge that this may not be true but we start with this assumption). Then, in the long run, DAU and transaction volume must increase at a rate faster than the declining price of Axies. Increased transaction volume will bring more revenue into the Axie Treasury thereby increasing the value of the team’s AXS holdings. In the short run, the team must maintain marginal profitability of breeding, and “reasonable” yields to achieve their long-term goals. Here we make two key assumptions. First, that the team’s express purpose is to maximize long-term AXS value, and second, that at substantially lower yields, players will leave and not return. This is the framework with which we will examine the team’s actions to show that yield farmers and the team have aligned incentives.

In order to grow DAU and transaction volume in the Axie marketplace and not allow Axie prices to trend to 0, Sky Mavis’ needs to do juggle two main forces:

1. Maintaining the marginal profitability of breeding
2. Ensuring adequate yield

Maintaining the marginal profitability of breeding

We assert that until Axie has a self-sustaining economy with Axie/SLP sinks, the team must maintain marginal profitability of breeding to ensure DAU growth and adequate yields.

If breeding becomes unprofitable, no more Axies will be bred or supplied to new players who want to acquire Axies. No new Axies will be sold on the marketplace, at which point the Treasury is no longer earning transaction fees, or the AXS portion of the breeding fee. AXS would decrease in value as transaction volumes and breeding fees dry up. Existing Axies will continue to mint SLP which will place massive downward pressures on its price (because in this scenario breeding is the only SLP burning mechanism.) If the SLP prices fall faster than AXS prices, this could result in a mass exodus of players who may never come back to the game.

However, in the presence of an Axie/SLP sink (items, Axie burn) assuming that existing Axies continue to be burnt during the time breeding is unprofitable, constant demand with limited supply would quickly raise the value of Axies restoring equilibrium to the breeding equation. On the other hand, even without a sink, if AXS declines faster than SLP then breeding profitability is restored, along with DAU growth (though probably not before losing a non-negligible portion of the player base).

On the other hand, if breeding becomes too profitable (AXS prices drop suddenly, breeding fees are adjusted to be very cheap) then in the short term SLP prices will rise as breeders scramble to meet existing demand. This would allow Axie Infinity to reach its local maxima DAU in the shortest period of time. However, given a couple of weeks, these newly created Axies will generate massive amounts of SLP, especially without an Axie/SLP sink, and once new player growth hits a natural stall, SLP will trend to 0. Once the price of SLP drops beneath the point where it is no longer profitable (opportunity cost of time, capital) to play, it will potentially trigger a similar mass exodus of players. Introducing Axie/SLP sinks after the fact becomes a matter of incredible precision with minimal room for error.

In either scenario, marginal profitability of breeding (dictated by fluctuating costs of SLP and AXS) must be upheld, otherwise, yields will trend to 0. This phrased another way would be that the team must always hold the

PV of SLP produced for an Axie > breeding costs of an Axie

thus ensuring yields will always be positive, “enough” to encourage breeding and compensate for an opportunity cost of capital.

However, this rule won’t be necessarily true once a working Axie/SLP sink is established, as people might be willing to take a loss in breeding profitability to create new Axies to burn. On the other hand, the incremental SLP earnable from an improved Axie through burning (assuming that burning one Axie can improve another Axie’s abilities and thus its win-rate/stats)  must be less than the amount of SLP earnable if that Axie was not burned and used to earn SLP instead.

Why execute the above by decreasing the AXS portion of the breeding fee while increasing the SLP portion?

By increasing SLP cost, they increase the amount of the SLP burned and decrease the rate at which Axies are created (as it pushes some breeders to choose to earn SLP instead of buying it off the market which, because of the 2 week unlock schedule of SLP, delays Axie creation). This supply-side restriction is however counterbalanced (in the short-term) by sustainment of yield, increasing/maintaining new player Axie demand. Thus DAU growth continues.

Insuring “Reasonable” Yields

On the demand side of the equation, the team must also ensure adequate yields to retain its existing player base. We define “reasonable” as the level of yield that will retain players. At current rates of ~300-500% we have seen that 30 and 90 day retention rates are basically the same. At “unreasonable” yields, retention would significantly drop. We have personal conjectures as to this level, however,  the official figures remain to be seen.

Because Sky Mavis wants to maintain its existing player base and conjecturing that the vast majority of its players play because of its earning aspect, the team has an express interest in maintaining attractive yields. The team also understands that people’s livelihoods depend on the price of SLP.

When SLP Sink? (Beyond Technical Reasons)

Ideally, the team wants to get Axies into the hands of as many people as possible. This maximizes DAU and likely transaction volume. However, if an Axie sink was introduced today, the price of Axies and SLP would rise quickly. A portion of Axies bred would also go to people who aren’t new players, rather to existing players who will be burning Axies before DAU can further expand, and many new users will now be priced out of the game.

It will also seek to enrich existing Axie holders at the expense of later entrants (assuming the majority of Axie DAU is yet to come) which increases the Gini coefficient of Axie. This is also somewhat against the ethos of NFT gaming, especially considering the core constituency of current Axie players.

For as long as growth remains the primary concern (until market saturation is reached), we strongly believe that the team’s incentives will ensure both the marginal profitability of breeding and adequate “snap-shot” yield (yield on Axies bought today).

Given these facts, in the short run, the Sky Mavis specific risk is a net positive for holders of Axies, scholarship managers, and holders of AXS.  Sky Mavis is acutely aware that many in the Philippines, Venezuela, and other countries rely on SLP production as their livelihood. We hope that at the very least this provides incentives to carefully manage the economy of the game.

Finally some legitimate (issues?) with long term economics

Increasingly more people want to play Axie having seen their friends and family afford washing machines and earn a living off playing a game. This means that the demand for Axies far exceeds the supply, driving up its price. This in turn raises the price of SLP, a core variable cost in the production of new Axies. But at long-term equilibrium where everyone who wants to be in the game is already in the game, what is the price of SLP?

Ultimately the demand for SLP arises from the demand for new Axies which roughly equals the entry of new players into the ecosystem and the desire for existing players to purchase more teams.

This means that the demand for SLP is driven by the desire to breed new Axies while demand for Axies is driven by the desire to earn more SLP. At the fundamental level, one Axie should only be priced at the desire for people to play the game and the dollar value of that desire. It is only because the production of new Axies cannot match the demand for new players that the price of Axies and the price of SLP is inflated at the moment. The supply is constrained by the desire to breed, a function of AXS prices and SLP prices, and the existing supply of Axies from which breeders can breed, while the demand for players increases exponentially via word of mouth. But at equilibrium, the value of the game accrues to the ability of the game to entertain.

This is not to say the current price is outrageous. If Axie as a game has the potential to captivate users regardless of the yield then the price of SLP and the price of one Axie may even appreciate. The issue is that at the moment, a large portion of the desire to play is fueled by a desire to earn, and it is hard to parse out exactly how many players are in the ecosystem because they genuinely enjoy the game mechanics or purely to earn (acknowledging that there are massive overlaps between the two groups).

As more people play for yield and automatically cash out their SLP at regular intervals, the amount of SLP sold on the market exponentially increases with DAU, and the number of Axies in the marketplace consequently increases as well. If no new player is there to buy up the Axies, if there aren’t any new utilities for existing Axies, then prices of SLP and Axies will correct.  At the moment Axies and SLP is an investment that requires the market to continue to grow at an expanding pace.

The Long Run is Not Today

The long run is paradoxically both closer and further away than people realize. It took Axie 3 years to get to where they are today.

On the other hand, there are 2.2B people who live on less than 10 USD a day who have a smartphone and only 1.5M DAU. At 15 USD a day there are more than 3B, half the world’s population, who have internet access. For as long as yields are low and people are out of jobs because of the pandemic, for as long as more people can play Axie as a source of income, we believe that Axie DAU growth, AXS price appreciation, and high yields on Axies will continue. It’s impossible to exactly time when the market will turn, and given that crypto and especially crypto-games are risk-on investments, it’s tough to forecast how changes in traditional yields and a global recession might affect the Axie ecosystem.

Today APY on defi bluechip protocols is less than 1%, only slightly higher than traditional yields. At the end of the day, no yield can be sustained and we will either see a correction in the price of SLP or a move up in the price of Axies to account for the mismatch of yield in P2E games and the real world.

What we have to also remember is that the game is still currently in alpha. In its current iteration, it is already an enjoyable game with lots of future developments to come. Once land-based gameplay is launched, the Ronin Dex shipped, the SDK made available, and merchandise sold, we'll get more information on how the game and the ecosystem will develop in the future.

Once those developments have launched, a bet against Axie will be a bet against the ingenuity of the ecosystem and the community. If any individual member, gaming studio, or collective that participates in the ecosystem can create any utility (a game, a protocol, art) that is interesting and fun that uses Axies, then the demand for Axies will naturally rise. At the very least, we do not want to bet against the creativity of the Axie community.

The Future of Lending NFTs

The manager-scholar market is an opaque market where capital providers and sellers, or employees and employers are connected on an ad-hoc basis without any systematization. Contract terms are purely arbitrary as employees have no power within the ecosystem, while as a manager, it’s impossible to ensure that the scholars abide by the TOS, exposing your capital to bans. If anything, Axie scholarships have shown that besides spot buying and selling, borrowing and lending of capital generating assets or NFTs for their utility, is the next natural step in NFT development - much like how after spot purchases we had de-fi and derivative markets in tokens. NFTs, in general, can be very expensive and people who can’t pay principal but want to harvest the utility of an NFT or take part in the social and financial perks of holding NFTs, or those who hold NFTs but want to derive financial utility from their possession before exit, all need an automatic market to connect.

We’re already seeing P2P marketplaces like the official Axie discord and YGG where trade and barter of scholarship-manager agreements happen on an ad-hoc basis, where take-rates are not transparent. This is the nebulous start of the future of NFTs as part of a larger financial system. On the other hand, it's exciting to think about what other protocols will develop that demystifies the opaque process of renting and borrowing NFTs in the future that moves it away from a dark P2P market to one with transparency about contract details, yields, and revenue splits. We have a couple of projects we are very excited about, but we’ll be back in another article.

Conclusions

In conclusion, Axie Infinity has established itself as a pioneer in the NFT gaming space. But it must not rest on its laurels and keep pushing the boundaries if it wants to achieve global mainstream status and longevity. There are many challenges ahead for Axie Infinity and the space of NFT gaming as a whole to navigate, but we are optimistic and excited about the future.

On one hand, maybe in a couple of years, we’ll have empty Ronin blocks and our past transaction histories to remember the game that once was. Or maybe in 20 years you and your family will be heading to Axie Park in Ho Chi Minh City/Orlando (in your Lambo of course), Axie plush toy and keychain in hand (on your metaverse avatar) while your eldest works part-time grinding an Axie MMO to save up for college tuition, converting his SLP earnings to ETH. Wherever we are in 20 years, in the words of Not.Boring:

“My bet is that this period in Axie’s life is just the start of something huge, a small blip on a much bigger graph, both in terms of revenue and impact.”

Thank you for reading and let us know if there is anything we can improve on!

Disclosure: We own small amounts of AXS and SLP, plus a couple of Axies. The above references our opinion and is for information and entertainment purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Shoutouts:

We’d like to thank @BlockchainatCU for funding the writing of this article and the several weeks we spent writing and researching for it. We’d also like to thank Ellen Langford for looking over and helping edit our writing. Finally, we’d like to thank @MetaGouverneur @Jihoz_Axie @amytongwu @Psycheout86 @AxieAur and On-Chain Gaming, Attack on Axie, Axie King, brycent on Youtube for teaching us about Axie Infinity. Please let us know at @terry15chung and @StingrayL0 if you have any comments or corrections!