The Biggest NFT Video Game's Economy Is Collapsing Because NFT Games Don't Work

[Playstation Tablet 1,772]

The biggest NFT game currently in the marketplace is Axie Infinity, a game—similar to Pokémon—in which players collect and battle monsters which resemble axolotl salamanders.

The business model for Axie Infinity and nearly all other nonfungible token (NFT) games is called "play to earn." In these games, all players must start by purchasing NFT characters on a marketplace. In-game assets and currencies are traded on crypto exchanges, so everything in the game is worth money. The often-high upfront cost of buying into the game is theoretically justified by the opportunity to earn money by playing.

Web3 investors are really excited about the prospects of games like this. Reddit co-founder Alexis Ohanian, who is an investor in Axie Infinity, believes play-to-earn games will be 90 percent of the gaming market in five years. And Sky Mavis, the developer that makes Axie Infinity, had the good fortune to be years ahead of the competition. Their NFT game launched in 2018, and they were live and operational when NFTs exploded in popularity and investors decided to bet that the blockchain was the future of gaming.

As a result of being first movers in the space, this once-tiny independent studio was able to raise $150 million in financing in October 2021 at a valuation of $3 billion. Around the same time, Sky Mavis trumpeted its game's tremendous subscriber growth, which exploded in the third quarter of 2021 to over two million daily active users. In December, Axie Infinity Shards (ASX), the game's governance token, had a market capitalization larger than that of the French games publisher Ubisoft, which makes the Assassin's Creed, Far Cry, and Watch Dogs games. In July, a single rare Axie monster sold for 369 ether, worth over $800,000 at time of sale. A rare plot of land in the game sold for 550 ether ($2.5 million) despite the fact that the gameplay features using in-game land are not yet available.

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However, some big problems have emerged in Axie Infinity: The value of an in-game currency called Smooth Love Potions (SLP) crashed from last summer's high, above $0.40, to a value of around $0.01 in January 2022, lower than its price a year earlier when few people had heard of NFTs and the game itself had only about 50,000 active players. This is a big problem for Axie Infinity, because the object of the game is "playing to earn" and SLP is the currency you earn by playing. As a result of plunging values, the volume of transactions for Axie assets may have fallen as much as 70 percent from its peak in just a couple of months. The floor price of the cheapest Axie characters fell to around $30 in January 2022, which signals that users are dumping their assets, since it often costs more than that to mint one of the characters. AXS, the governance token, has lost over 40 percent of its value since Christmas, a paper loss of billions of dollars.

By looking at what's going wrong with Axie Infinity, we can see how the play-to-earn business model has major problems with no clear solutions.

 

The resources in Axie Infinity as it currently exists are: Axie monsters; AXS cryptocurrency, some of which is awarded as a prize to the top handful of competitive players, but which all other players can only acquire by purchasing it; and SLP, which is an in-game reward currency also traded on crypto exchanges. The way players are supposed to earn money in the game is by selling their extra SLP for cash.

An Axie monster is kind of like a Pokémon, and Axie battles are similar to Pokémon battles, but each monster is connected to a token and can be sold on crypto exchanges. To play the game, you need at least three of them, and you have to start by buying your monsters for real money from other players—there's no Pokémon professor to give you a starter monster, and you can't catch anything in the game.

New Axies are only produced by "breeding" existing Axies. When two Axies are bred, they produce an egg which will hatch after 5 days into a new NFT monster with a mix of characteristics inherited from the parents, and possibly some random mutations. Breeding Axies costs a fee that must be paid in AXS tokens as well as a variable amount of SLP depending on how many times the parent Axies have produced offspring previously.

So, in order to produce a new NFT character, you have to pay a fee that is usually between $30 and $80 in crypto, depending on the current price of AXS, as well an amount of SLP representing hours of time spent playing and worth what has, at certain points, been a significant amount of real money. Producing the offspring also depreciates the value of the parent Axies, because the SLP cost of breeding an Axie rises each time it is bred, and after breeding seven times, Axies can no longer produce offspring.

The most important things to know about Axie breeding is that it is a costly and risky activity, and it is the only activity in the game that removes SLP currency from circulation.

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Here's how "play to earn" works in the real world: Over 40 percent of all active Axie Infinity players are in the Philippines, where the per capita GDP is about $3,300 per year. The second highest concentration of Axie players is in Venezuela, where the economy has been in complete collapse since 2013 and the local currency has been rendered near-worthless by hyperinflation. Only about 6 percent of Axie Infinity players live in the United States. It has been difficult for games like Axie Infinity to acquire players in the developed world because many gamers despise NFTs and these games look and play like free-to-play phone or browser apps, but require players to buy hundreds of dollars worth of NFTs to get started.

Most players in the global south gain access to the game through "scholarships," arrangements in which a manager—sometimes a player in the developed world with a large stable of extra monsters, and sometimes a crypto investor who is speculating on Axie assets—loans a player a squad of Axie monsters to play with in exchange for a cut of their SLP earnings. "Scholars" aren't looking to amass large collections or climb the competitive ladder. They're not really approaching Axie Infinity as gamers or investors—they're being hired as laborers. They harvest the roughly 220 SLP a player with a relatively inexpensive team of NFT monsters can obtain each day for grinding out the daily 100 SLP from adventure mode, winning a few arena matches, and earning 50 SLP for completing the daily task. They never breed any new Axies; the currency they earn is always quickly sold off on crypto exchanges.

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But game economies don't work like real economies where payments in currency come from a circulating, finite money supply. Instead, in-game currencies are created whenever someone earns a reward—in the case of Axie Infinity, clearing adventure levels, winning arena matches, or completing their daily quests, and game currency is deleted when it is spent on a "sink,"—some activity which induces players to pay the currency back to the game. In Axie's case, the sink for SLP is breeding new monsters.

Far more SLP is being generated than is being spent on breeding. Only 5 percent of players have ever bred Axies, and only 5 percent of players who have bred Axies do so again in consecutive months. A large percentage of the player base is creating SLP through their gameplay and then shoveling it into the marketplace, while a much smaller sliver of the player base is consuming SLP by breeding Axies. About 250 million SLP are produced each day, while only 50 million are used for breeding. This creates a monthly surplus of 6 billion SLP, a recipe for massive inflation. For a while, speculative investors were snapping up the currency, perceiving it as a cheap way to invest in the future of NFT gaming. But as workers in the developing world learned of the windfalls they could reap from the game and started farming for SLP, the volume of SLP being produced skyrocketed, these investors saw their holdings devalued by the flood of currency pouring into the marketplace.

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No NFT game developer has yet presented anything that seems likely to solve the fundamental problem of the play-to-earn model: Any time the currency in a video game rises in price so that it has substantial real-money value—whether because of hype surrounding a new game, or investor interest in a title, or because of new features in an existing game like the ones Sky Mavis hopes will reverse the fortunes of Axie Infinity—the demand for the resource creates an incentive for laborers in developing countries to surge into the game in large numbers to farm the currency until the available supply swamps demand and the price tanks again. The market for any currency that is generated as a function of players' time spent grinding in a game will only reach equilibrium when the price of the currency is valued based on the price of time for the players whose labor is the cheapest, and for players in the developing world, that's pennies per hour.

And developers can't control the supply of currency by taking measures to punish the gameplay patterns typical of players in the developing world, because the bulk of the game's user base would instantly disappear if the developers got rid of them. Such measures would also deter new players from joining the game, because cutting off rewards for people who play like "scholars" would make it difficult or impossible for any player joining the game with a modest collection to earn back their initial investment or expand their collections through playing.

Further, play-to-earn models require constant user growth. The real money economy of a game like Axie Infinity is zero sum—no money is produced inside the game, so the only money anyone can take out of the game is money somebody else has put into it. Everybody's goal in the game is to make money; they're all "playing to earn," but the only players investing more money into the game than they expect to take out of it are new players who have to buy stuff to get started. When there are not enough people buying more than they're selling, the game economy collapses.

[Twinblade★ 4,074]

This sounds like a nightmare. This shit needs to stay out of gaming.

[Playstation Tablet 1,772]

13 minutes ago, Twinblade said:

This sounds like a nightmare. This shit needs to stay out of gaming.

It hasn't even started and its a flop. Imagine if every game tries to implement this shit how will any of this trash be sustainable.

[FIREPOWER 825]

Good. NFTs are a fucking scam that have no place in gaming.

[TLHBO 2,212]

Games are meant to be fun (at least non-xbox games are), who the fuck wants to deal with this shit? Having to monitor a fucking economy for the best time to buy and sell

[Playstation Tablet 1,772]

1 hour ago, TLHBO said:

Games are meant to be fun (at least non-xbox games are), who the fuck wants to deal with this shit? Having to monitor a fucking economy for the best time to buy and sell

The laughable part is that this shit they want to add to SP games. It's okay in fully fledged MMOs but even most of those are flops outside FFXIV/WoW and Eve.