Play-to-earn game Axie Infinity: Where does the money come from?

So-called play-to-earn games — blockchain-based platforms in which players can earn real money — had a breakthrough year in 2021. But no crypto game has rivaled the popularity and fanfare of Axie Infinity. 

Axie Infinity has been seeing nearly 3 million daily active users and more than $2 billion in transactions — helping its creator, Sky Mavis, raise $152 million at a $3 billion valuation in October. This success also spurred an explosion in the blockchain gaming sector last year, attracting nearly $5 billion in venture funding.

The fundamental idea is simple. Players earn tokens for playing the game, and can then sell these tokens for other items or swap them for currencies in the real world. It’s like normal gaming, but you earn money along the way.

While simple, it has proven to be highly effective as a scaling strategy. Axie Infinity spread like wildfire across the Philippines, accounting for 40% of its daily users — some 1.2 million users — largely because playing the game at times has been more lucrative than earning minimum wage.

Yet how is it possible to hand out tokens that have real value to millions of players per day? Where does all this money come from? And is it sustainable?

The game’s creators like to point out that Axie is not just a one-way system, but is rather a “circular economy” in which the distribution of new tokens to game players is balanced out by players spending those tokens in the game. 

But the longevity of the project isn’t solely based on these different economic forces happening to find some kind of equilibrium on their own. Rather, the health of Axie Infinity’s economy depends on the actions of the game’s creators, who effectively act like central bankers.

How the Axie economy works

The object of Axie Infinity is to earn SLP tokens. These can be swapped for ether (ETH) to buy more players, called Axies, in-game items or parcels of land.

At present, Axie Infinity gives out around 187 million smooth love potion (SLP) tokens per day, worth $3.3 million, to its players. (At times the issuance has been even higher; on a single day in April last year, the game minted 1.2 billion SLP tokens, worth $63 million.)

But the value flows in both directions.

While the game gives out tokens that can be cashed out, by design, many of them will be spent within the game — and occasionally destroyed. Players can also spend their own tokens on Axie Infinity items like decorations for its upcoming metaverse and other extras in the same way they would with a normal video game.

Around 17 million tokens are burned per day at the moment, worth $300,000. The amount of tokens being burned per day has stayed relatively steady over the last few years, while the issuance has steadily increased.

“Axie works as a play-to-earn economy because it’s incredibly fun and it’s an incredibly strong community. There are people who are spending in the ecosystem, in the network, without expectation of profit,” says Axie Infinity co-founder Jeff Zirlin. “Why are they spending? For fun, for status.” 

Zirlin argues that there are also social benefits to playing. “This is what sustains the network, this is why Axie cannot be easily replicated,” he says. “If it was just about copying the mechanics, then there would be many play-to-earn games that are successful and large.”

When a new player wants to start playing Axie Infinity, they first must use ether to buy three Axies from other players, at a current minimum cost of around $195 in total. This brings money in from outside the game, which goes to existing players. They're typically sold on the platform's marketplace, which takes a 4.25% commission on every trade — one that goes to the project's treasury.

Breeding new Axies also costs money, and breeders must spend both SLP and a second token, called axie infinity shards (AXS). The AXS used in these transactions goes to the treasury, and the SLP is destroyed (a process known as burning). This helps to reduce the supply of SLP, counteracting the high inflation rate that goes along with handing it out daily to reward players.

At the same time, breeding is the main source of revenue for the Axie Infinity treasury. Breeding has generated $1.1 billion for the treasury, while marketplace fees have only brought in $161 million.

To sum up, new money comes in when new people buy Axies, players spend their own tokens on in-game items and people recycle funds that they’ve earned playing the game by breeding new Axies. 

On top of this, traders are speculating on both cryptocurrencies (SLP and AXS) and buying or selling tokens — raising and dropping their values. The game takes a cut on purchases of Axies, land or items through the Axie Infinity marketplace, and has built up a $2.2 billion treasury. Token holders could vote on what to do with this treasury (if Sky Mavis elected to give them the choice) and it could be used for further incentives — such as buying back and burning SLP tokens — although nothing has been planned yet.

Is Axie Infinity sustainable?

Ultimately, it’s too simplistic to describe Axie Infinity as a play-to-earn game.

Rather, it is a complex economy, and the success of such an economy depends on if it can find an equilibrium, or maintain its momentum for an extended period of time. But it’s not solely down to chance.

Sky Mavis is able to manage various elements of how the game works in an attempt to keep its economy in good shape. “We’re the economic planners within the system,” says Zirlin. “We’re adjusting the breeding fee. The emission [of tokens] through the game, based on what we’re seeing with the market.”

Zirlin says the company tweaks the variables to ensure that the game doesn’t collapse. To do that, he says, the team looks at current demand along with expected future demand — particularly when it comes to how many new Axies the game needs to create. Plus it looks at how the liquidity for SLP can be maximized so it can absorb the selling pressure of gamers dumping their tokens after playing. 

“This is a real digital economy and we’re acting as the bankers,” Zirlin says.

Yet at present, these tweaks are not doing enough to keep the price of SLP from dropping significantly in value. The token is currently worth $0.017, down 95% from an all-time high of $0.364. This means that players who bought Axies hoping to see a certain return by playing the game will receive much less value than they were expecting.

Mohamed Ezeldin, token lead at Animoca Brands, reckons this is because there aren’t enough ways to spend SLP within the game. 

“In my opinion, there aren’t enough sinks for the token,” Ezeldin says, pointing out that the players can only use SLP for one thing, breeding Axies. “What Axie shows us is that you need more utility for different tokens for price to maintain genuine price action or price appreciation over time,” he says.

Axie seems to agree. Its official account recently tweeted that the game’s creators will focus on adding economic sinks in 2022. Zirlin has also been discussing which sinks are the best way to burn tokens without annoying the community. Further, some Axie Infinity community members have been speculating that upcoming new types of tokens (that developers have seen in Axie’s code) might only be accessible to people who burn their tokens.

This all means that Axie is clearly aware that it needs to get this balancing act right. If the whole system were to become unbalanced — say, if the value of the token rewards dropped so far the game became no longer worth playing — it could pose challenges. New players might not join the game and existing players could leave, further reducing the game’s income, causing the token price to spiral down even further. It’s something that could provoke the community to consider using the treasury as a last resort to keep the economy alive.

Zirlin points to how Axie Infinity stopped growing during the crypto bear market in 2018 and 2019. But he argues it’s a problem for all games that depend on in-game spending, regardless whether they offer play-to-earn features.

“Any game where people stop spending money, all these games die and collapse," he says. "This isn’t just the characteristic of NFT economies.”