Axie Infinity Part 1: Economics

Demystifying the economics of Axie Infinity

Axie Infinity is a blockchain game that allows players to earn tokens as they play, earned tokens can then be exchanged for other crypto or fiat currencies. The difference between a traditional game and a blockchain game lies in the blockchain economic incentive design. Characters, items, tokens in a traditional game like Fortnite are legally owned by the game producer and can’t be legally traded or sold for fiat. Axie Infinity is a turn-based card game similar to chess but its economics are uniquely designed. There are 4 main actors in Axie Infinity:

1. Axies

Axies are Pokemon-like digital pets and to play the game, each player is required to hold 3 Axies which currently cost $1–2k. An Axie is issued as an NFT on the Ethereum blockchain. Axies can be fought, bred and traded.

a. Battling

Battling is basically playing the game. Each player is limited to 20 multiplayer games and unlimited singleplayer games a day even though there is a cap on daily earnings from singleplayer games which tend to be easier. By playing 20 multiplayer games and 20 singleplayer games a day for 3 hours, with conservative win rates, an average player can earn up to 75 SLP a day.

A beginner who wins all 20 multiplayer games can earn 100 SLP, whereas an experienced player can earn 200 SLP and a pro player can earn 300 SLP. SLP earned per multiplayer game is correlated to the multiplayer win % track record a player has.

b. Breeding

The game allows for Axies and their offsprings to be bred up to 7 times, theoretically resulting in an infinite supply of Axies. As an Axie’s children count goes up, its breeding cost also rises. It costs 4 AXS + 150 SLP to breed a virgin Axie and 4 AXS + 3000 SLP to breed an Axie with 6 children.

c. Trading

A prospective player would need to make the required upfront investment and buy 3 Axies from Axie Infinity’s marketplace to play the game. Axies on the marketplace are sold by other players who sell their existing Axies or their newly bred offsprings. The game developer rarely issues new Axies, thus the circulating Axie supply is a result of breeding.

2. SLP

SLP token is an in-game, ERC-20 token issued on the Ethereum blockchain. SLP is minted to reward players who battle their Axies by playing the game. Daily SLP rewards are at the heart of Axie Infinity’s play-to-earn model and are what lead Filipino, Indonesian farmers to resign and play Axie Infinity full-time.

SLP has no fixed supply and its daily mint level is driven by the number of DAUs, whereas its burn level is driven by the number of breeds as SLP is required to be burned to breed an Axie. Thus, higher DAU growth results in inflationary pressure, higher breeding growth results in deflationary pressure on SLP.

3. AXS

AXS token is an ERC-20 token issued on the Ethereum blockchain. AXS is the governance token of Axie Infinity DAO and allows token holders to propose and vote on various subjects. SLP behaves more similar to an in-game currency, whereas AXS behaves more similarly to equity.

AXS DAO currently generates revenue through marketplace and breeding fees. 4.5% of each marketplace transaction and 4 AXS per breeding goes to the AXS DAO treasury as retained earnings which can then be distributed to AXS token holders as dividends. Thus, higher marketplace volume growth and higher breeding growth result in deflationary pressure on AXS which has a fixed supply of 270m.

The current circulating AXS supply is 61m, AXS supply will be fully released over the next 5 years. 20% of AXS will be distributed to players as incentive rewards which act as a marketing budget to incentivize players to take specific actions. 29% will be distributed to AXS holders as staking rewards, 21% will be distributed to Axie Infinity inventor Sky Mavis and the rest will be distributed among investors and advisors.

4. Sky Mavis

Sky Mavis is the software development company that invented Axie Infinity. Although it only has 21% stake in AXS, Sky Mavis has a significant influence in the game and acts as the regulatory body through the game rules. Sky Mavis also receives a fee from the AXS DAO for the ongoing development of the game.

Sky Mavis determines critical rules such as i)AXS+SLP required to breed, ii)daily SLP rewards per win, iii)maximum daily game allowance per player, iv)maximum breedings per Axie.

Guilds

Similar to real estate investors who build a portfolio of properties and rent them out to earn a steady yield, some deep-pocketed Axie enthusiasts built guilds that own thousands of Axies and rent them out to prospective players who can’t afford the $1–2k upfront investment to play the game. Guilds have a revenue-share model where they allow tenants who are called scholars to keep 50–70% of earned SLP.

Guilds use earned SLP to breed more Axies and scholars use earned SLP to either pay for their cost of living or save to buy their own Axies. Guild business model is predicated on Axie prices remaining high. Guilds have been building communities in various countries and have become an important player acquisition channel for Axie Infinity.

Long-Term Strategy

Sky Mavis’s long-term goal is to create a social metaverse similar to Roblox where players can interact with others, meet people and play games together. Axie Infinity is working on an SDK that allows for user-generated games to be built on top of Axie Infinity which will add more utility to Axies.

Sky Mavis is currently adding virtual lands to the game and is selling parcels of virtual lands as NFTs. There are 17k parcels and prices start from $12k. How the lands will be embedded in the Axie economy is yet to be revealed but it shows the numerous opportunities Axie has.

AXS DAO can generate revenue from future channels such as selling cosmetics/consumables, organizing tournaments and charging an entrance fee, charging fees to upgrade Axies, issuing/selling rare Axies, sponsorship fees.

Conclusion

Sky Mavis created a giant economy with employees, citizens, currencies and property. In part 2, I’ll be covering Axie Infinity’s sustainability which is crucial to ensure Axie Infinity’s long-term success.

I’m grateful for the Axie Infinity and Yield Guild Games discord members who have patiently and diligently answered all my questions. If you want to learn more about DeFi and blockchain games, you can follow me on Twitter.

Disclosure: I hold a small portion of AXS tokens.