Is Axie Infinity sustainable?

The real question is, do you believe in the Sky Mavis team to make a great game?

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*First off, full disclaimer, I am an active Axie Infinity player and therefore by definition have put real monetary investments into the game and ecosystem. I could be biased but am also a paranoid investor so I’ll try to present the most rational and realistic analysis here possible. Also, this is not financial advice!

*If you’re interested in learning more about the details of the game you can check out this guide, but I’ve written this assuming you understand the basics of Axie Infinity.

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tl;dr

• Axie economy is currently dependent on deposits of ETH into the ecosystem driven by demand for Axies

• Current Axie demand is likely driven primarily by new players

• When new player growth slows in the long-term, if players generally earn more ETH than they put into the game, the economy will dip

• To ensure sustainability, there will need to be more demand for Axies [or other in-game NFTs] from existing players to gain non-monetary value such as fun, achievement, mastery, and social-bonding.

• Upcoming announced features should help drive additional non-monetary value for players such as Land gameplay, Crafting, and Soulbound Axies.

• There are many other feature ideas that can drive non-monetary value for players too, such as as Collection Goals, Cosmetics, and Virtual Pet gameplay.

• Overall, long-term Axie [and other in-game NFTs] demand is a real risk to the sustainability of the game. However, Sky Mavis is well positioned to address it and has the runway to do so.

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The blockchain-based game, Axie Infinity, has taken off recently with revenue in the game exploding:

Source: Axie World

With that, more and more people have also learned about this new “play-to-earn” gaming model where players can earn real money from playing the game. A common reaction to this is… who is funding this and how could it be sustainable?

To understand this, let’s first explore how the overall economy works.

Axie Economy

Here is a visual representation of the Axie economy:

The primary flow of money into the Axie ecosystem is from external ETH accounts. Ultimately, Axie Infinity needs to continuously have that inflow of ETH deposits higher than the withdrawal of ETH, for people within the ecosystem to be able to continue to earn sustainably.

The demand for ETH deposits is driven by motivation to purchase Axies to Battle (where SLP can be earned), Breed (where SLP is burned), and/or Collect.

Here are some scenarios on how the economy can shift currently:

• Increased demand for Axies

  • Axie prices go up > Breeding profitability goes up > SLP/AXS demand for breeding increases > SLP/AXS prices go up

• Too much SLP earned in Battle

  • SLP inflates > SLP price goes down > Breeding costs go down > More Breeding > Axies inflate > Axie prices go down until Breeding becomes less profitable

That’s how everything works - so the question now is, can demand for Axies sustain over time so those external ETH deposits into the ecosystem subsequently sustain?

Sustainability

Axie Demand Risk

As per the economy outlined, currently the entire system is driven off of demand for Axies. This is where I need to make some educated guesses since I have no data from Sky Mavis or any proper player research available. Here are some assumptions based on my observations:

• Although there are definitely a lot of core and early players who purchase Axies purely for PvP and to Collect, with the recent explosion in popularity and the “play-to-earn” narrative, there are likely more players now who purely play to earn and if not for earning potential would not acquire Axies and play.

• There is a complex meta for PvP players but there are only so many combinations of Axies one would realistically need and at some point they would likely stop or slow down on spending newly deposited ETH on Axies.

• Therefore, most of the Axie demand and net new deposited ETH into the Axie ecosystem currently is likely driven by new players

It has also been mentioned by Sky Mavis multiple times that new player growth is important to sustain a new product like Axie Infinity.

Therefore, there is certainly a risk currently that if growth of new players slows for the game, demand for Axies will go down, and the overall market could go into a downward spiral. Axie demand goes down > Breeding profitability goes down > Demand for SLP/AXS goes down > SLP/AXS value goes down.

No one knows when new player growth could slow but there is likely reasonable runway given Axie Infinity is still relatively early in gaining any mainstream recognition. However, Sky Mavis does need to solve for this before they reach that point of plateauing growth.

Good news - they have already told us and have been very vocal around how they are looking to solve for it here: Axie Population & Long-term Sustainability. I’ll touch on some of those tactical points a bit later but first let’s understand how instead of having Axie demand mostly from new players, they can drive intrinsic demand for Axies from existing players.

Intrinsic Demand for Axies [or other NFTs]

Ultimately, Sky Mavis needs to ensure that there is enough demand for Axies over time from people who intrinsically want Axies [or other in-game NFTs] to battle/collect/progress in the game with, versus only to earn. If most players only want to earn and withdraw more ETH than they deposit into the game, and if eventually there aren’t enough new players coming in, then there simply will not be enough ETH left in the economy for everyone to come out positive.

Is driving more of this intrinsic desire for Axies possible? Of course. Axie Infinity is first and foremost a game and for the entire history of games [until now] people have gained intrinsic value from games which they traditionally actively pay for and get no monetary return - simply getting value in the form of things like fun, social-bonding, achievement, and mastery. Many early and core players likely are in this group already, it’s more so that the large influx of purely pay to earn players may need to be converted if the core cannot sustain the economy on their own.

Sky Mavis has to ensure Axie Infinity is just a really fun game people want to acquire Axies [or other in-game NFTs] to play regardless of earning potential. Based on my personal experience, the current game is actually very fun on its own once you dive into the meta of PvP battles, however it’s hard for me to go through an improvement loop due to the higher cost of certain more meta-relevant Axies. For many players they may find the pure PvP play less satisfying for their needs too. These are just a couple areas that can be addressed to increase the fun factor.

Increasing Intrinsic Demand

“Make the game more fun” so that people want to play for fun versus play to earn is vague. As I mentioned earlier though, Sky Mavis has outlined a bunch of ways they are looking to tackle it here: Axie Population & Long-term Sustainability. These include not only ways of improving overall gameplay value, but also increasing the volume of Axie demand from players who are already getting non-monetary value from the game [e.g. competitive PvP-ers]. Let’s explore a few of the mechanics outlined in Sky Mavis’ whitepaper:

• Land will introduce significant new game mechanics that players could gain more intrinsic gameplay value from that will drive more Axie demand. In addition, there will also be demand for Land itself which will drive new ETH into the ecosystem. Players will be able to feel more ownership over a particular space in the game that they want to improve regardless of monetary gain [think Animal Crossing!]. The overall concept of just hanging out in Lunacia with friends, fighting monsters together, and participating in various activities sounds very exciting on its own. This brings in MMORPG style gameplay which is extremely popular and fun!

• Crafting Axie power-ups & Axie Releasing could drive significant Axie demand for the hardcore PvP players who are primarily motivated by competition, as they will potentially need to release Axies to be able to craft items that will power-up their other Axies. This creates an Axie sink which doesn’t exist at all currently.

• Soulbound Axies that are non-transferable and competitive in the arena will be a game-changer to allow players to simply play and enjoy the game without having to put in a big investment upfront. This will help them become invested in the core PvP game-loop so that if and when they do decide to invest in non-Soulbound Axies they will be more likely to do so without purely play-to-earn motivations, but more to compete with others and gain mastery.

There are many other areas that Sky Mavis could explore as well, a few include:

• Collection Goals: As with many other types of games like Pokémon, collecting different unique creatures can be intrinsically exciting and fun. There currently exist Mystic Axies that are scarce and definitely collector items, however they’re quite expensive and not as accessible. Sky Mavis could build gameplay where you have explicit collection goals and guidance on what may be good Axies to collect. You can show-off your collection of unique and rare Axies to others and it could unlock various in-game benefits too. This type of gameplay would be motivating and exciting for collector and completionist type gamers.

• Cosmetics: Some of the largest games out there monetize purely off of cosmetics [e.g. Fortnite, League of Legends]. Players want to be able to show-off and express their unique identities in games. If players could add cosmetics to their Axies that other players would see in Land and PvP gameplay, they will definitely be very motivated to acquire them. Cosmetics would be NFTs that players can purchase, trade, or earn. The great thing about it is that many players will want to acquire them to keep long-term and put on their Axies to show-off, and not necessarily for financial gain.

• Virtual Pet: Neopets, tamagotchis, and many other virtual pet games have been shown to be wildly popular for more casual gamers. This is another area Sky Mavis could expand Axie further into, by creating more gameplay where players nurture and build a relationships with individual Axies. If real emotional bonds are formed players will be reluctant to ever release the Axie and there will be inherent demand for them as pets, not as earning vehicles.

In the future, I believe Sky Mavis will also open up their API further for others to develop games and experiences in the Axie Infinity universe, which will drive an explosion in different ways players may want to use their Axies too!

Conclusion

As a brand new and innovative game, Axie Infinity is not without its challenges and there are definitely risks around its sustainability if player growth plateaus. However, the Sky Mavis team is very aware of these risks and are actively addressing them in intelligent ways. Also, I do not see the growth of the player base plateauing anytime soon given it is far from mainstream notoriety. There will likely be volatility over time though so that is definitely something to be aware of for anyone investing into the game. Overall - I’m excited to see how the game develops in the upcoming years and progress as an Axie Infinity player!