Play-to-Earn is the next Liquidity Mining, is Axie Infinity overrated?
Date: 7/16/2021
Author: Forest Bai (Partner of Foresight Ventures), Yuanqi Li(Analyst of Foresight Ventures)
Translator: Xi Chen (Assistant Analyst of Foresight Ventures)
Abstract
We mentioned that Axie’s NFT sales surged in the July 5th post, “Axie Infinity Drives NFT Sector Against the Odds | Foresight Ventures Weekly Brief’’, in the following weeks Axie Infinity ignited the metaverse and created alike “DeFi Summer” atmosphere in July, a month when the crypto market continues to be sluggish.
This article explains the definition, rationality and long-term viability of “Play to Earn (P2E)” model, and the new industry it brings, P2E is disrupting not only the traditional gaming industry but the low-income.
Last but not least, by analyzing the data of Axie Infinity, even if there is some overheating in the current price, its business fundamentals are still very strong and will stir up the crypto ecological landscape including DeFi mining in the long run.
What is “Play-to-Earn”?
The “Play to Earn” business model has a long history in traditional games. Lots of game players such as World of Warcraft and Onmyoji earned money by selling their equipment or gear. This model is updated on blockchain games,players can earn real money by playing games with cryptocurrencies as the underlying assets (NFTs). By actively participating in these virtual economies, players can earn rewards, such as in-game assets and tokens, which can be traded or sold on the open market then.
This is an important shift in the game industry because in-game asset trading has only been within the gaming ecosystem traditionally, making it difficult for players to trade or sell their digital assets outside of the platform.
Some people in developing countries can’t earn good money. And they can dispute this situation with the help of digital devices and the Internet. Filipino players of the blockchain game Axie Infinity can earn $500 per month in the game, which is 2–3 times the local minimum wage.
From Free-to-Play to Play-to-Earn
Several years ago, players must pay for game licenses. After the Internet era, the free-to-play model gradually developed. By free-to-play, it means that players can get the basic game experience without paying anything, while they need to pay additional fees for the advanced game experiences or personalized items. Most of the world’s highest-grossing games are these so-called free-to-play games. In June 2021, Tencent’s “Honor of Kings” handheld game drew nearly $277 million (about RMB 1.79 billion) in the global App Store and Google Play, up 21% from June 2020. These free-to-play games are already earning billions of dollars per year, which shows that the free-to-play business model has matured and developers have learned the art of monetizing free-to-play games.
Source: sensortower.com
P2E is an evolutionary version of free-to-play to some extent. Blockchain technology is a key component of the game-to-P2E model, which gives players ownership of in-game assets and allows them to increase their value by actively playing the game. The majority of revenue in P2E games no longer goes to the large centralized game companies, but to the best players. By participating in the in-game economy, players are creating value for other players and developers, so in turn, they are rewarded with in-game assets. These digital assets can be any crypto asset that is corroborated on the blockchain. This is why the P2E model can match blockchain games.
On the other side, P2E games may not be totally free. Take Axie Infinity as an example, players need to buy at least 3 Axies to start the game, which can cost hundreds of dollars. But it is still reasonable . First, matching inputs with outputs is a healthy economic model in the long run. Second, game development costs money, players can gain value by selling crypto assets, so it is acceptable for them to pay some start-up costs. In other words, it is not a sustainable economic model if the game is completely free.
Play-to-Earn Inspires a Whole New Industry
The P2E model, powered by blockchain technology, is opening up digital native economic opportunities to a whole new segment of the population. Playing games is no longer just consuming time, but working by playing games day in and day out, they put in time and labor to earn money for their families, and Axie Infinity is a proper example. Especially during the Covid-19, poorer groups in need of extra income tend to benefit the most. Since part of the mission of cryptocurrencies has been financial inclusion and open source for the digital economy from the beginning, it is critical to bring the neediest among them on board — and P2E 2.0 delivers on that. Axie’s economic model illuminates how the concept of cryptocurrency can be applied from demonstrable scarcity to monetary policy in the context of playing the game — and earning it.
The P2E business model has inspired game developers, players, and ecological organizations such as guilds.
P2E games have given birth to some very powerful guilds that will play a significant role in the future of the gaming industry. Take the Yield Guild Games (YGG) in Southeast Asia as an example. They have four main goals:
- Investing in NFTs that generate the best returns in the metaverse.
- Building a global gamer economy.
- Generating revenue by operating and leasing NFTs.
- Encouraging community participation in guilds.
YGG has established scholarships, which are designed with a guild-community manager-scholar structure where guilds are responsible for nurturing and leasing in-game NFTs, lowering the barrier for players to enter the game. The community manager is responsible for recruiting, training, and mentoring new players, which is key to Yield Guild’s replication, expansion, and success in Southeast Asia.
Yield Guild would not have to manage any scholars directly with the help of community managers, but simply find the right community managers to work with. Scholars ultimately receive only 70% of the game’s revenue, plus 10% for the guild and 20% for the community managers.
This is a very traditional business model, where the capitalists provide means of production to proletariats, proletariats earn labor income, and capitalists get the surplus labor value. As long as the economic ecology of the game is large enough, the guild will gain a very large economic value.
Amy Wu mentioned that P2E created Guilds 2.0, income-generating organizations that buy, nurture, lease assets and provide jobs to communities. They can solve the cold-start challenges of new NFT games and also become dominant buyers of new assets (e.g. Axies). 500,000 DAUs in Axie Infinity are mostly scholarship earners. For these players, their replacement is not only a game like Forenite, Axie Infinity replaces an Uber or Grab position.
Is Play-to-Earn a False Proposition?
In fact, Axie Infinity model is similar with Qutoutiao, which is one of the three giants in Chinese low- end market, adopts the “read to earn” subsidy model. Users can get cash rewards by registering, reading, sharing and pulling new. This model once brought Qutoutiao high user growth and made it land on Nasdaq in just two years. But according to the stock price and financial data, this model is a failure, because the stock price has fallen from a high of $18 to less than $2 at present.
The main criticism of Qutoutiao is that its low-quality user base has difficulty attracting high-quality advertisers. Almost all of its users are deal-hunters, and the low demand for news content from this group of users has led to the platform being filled with spam. Moreover, such users are not loyal to the platform, and it is difficult to achieve the conversion target of advertising. Therefore, it is difficult for the news business to form a healthy balance of revenue and expenditure.
At first glance, P2E’s model is very similar to Qutoutiao, but P2E’s model is feasible. Advertisers will pay the bill for the users, but they are not highly motivated due to the low conversion rate. While In P2E, the economic model is endogenous, and essentially players share the revenue from the growth of the game ecology. With more and more players, the demand for in-game crypto-assets grows, and players sell assets to each other, forming the prototype of a metaverse economy, a world with farmers, merchants, and consumers. The key is that these players have close goals of interest, and unlike the users and advertisers in Qutoutiao are in a relationship of extracting value from each other.
Why Do We Think Play-to-Earn is the Next Liquidity Mining?
The DEFI industry was inspired by the “DEFI summer” in 2020, and DEFI TVL grew more than 100 times within one year, with UNI, LINK, and AAVE currently in the top 30 of the cryptocurrency market cap list. The development of DEFI is absolutely inseparable from the creation of Liquidity Mining, and it can be said that Liquidity Mining is the biggest contributor to the security of the DEFI industry.
There was a lot of skepticism at the beginning of Liquidity Mining’s launch, because it was much like the previous ICOs where users were initially rewarded with platform coins by providing their own ETH and stablecoins, which was seen by skeptics as a new side scam and bubble. But a year later, liquidity Mining’s model has been proven by the market. The main reason for the success is that these DEFI protocols actually create value, and Liquidity Provider’s revenue is actually a share of the protocol’s growth revenue.
As mentioned earlier, the P2E model is a platform for players to share the benefits of the growth of the game ecology as well. As long as the game ecology continues to grow, this set of economic flywheels can continue to rotate, so this model is valid even if the bubble clearing phenomenon such as asset over-issuance and price decline occurs in the process.
In terms of market participants, the participants of Liquidity Mining are “institutions-users-digging and selling farmers”, while the participants of P2E are “guilds-players-deal-hunters”.
Optimistically, the market for P2E is much larger than the one for Liquidity Mining. In terms of revenue, Axie Infinity earned $8.8 million in a single day on July 16, and King’s Quest earned an average of $9.2 million per day in June.
Source: tokenterminal.com
In terms of user numbers, Axie Infinity’s DAU has exceeded 500,000 people, while the top ten 24-hour users of the DEX protocol on July 17 had a combined total of just under 300,000, shockingly Axie Infinity’s DAU was less than 30,000 three months ago. Meanwhile the vast majority of Axie Infinity’s players did not understand blockchain technology prior to this and do not even understand blockchain to date. Compared to DEFI, blockchain games have lower barrier, especially after opening the fiat channel and using low-cost sidechain, the game experience is almost the same as traditional games. This is one of the important reasons for the fast growth of Axie Infinity’s players. It is also foreseeable that blockchain games will become well-known among passersby at a faster pace and gain a larger user base than DEFI, which is a much bigger market than DEFI.
Source: debank.com
NFT Plays a Core Role
NFT plays a crucial role in the economic ecology of a game, and NFT influences the gameplay and revenue. They adopt different categories of rarity to ensure a limited supply of certain rare NFT, rather than a disorderly growth of NFT (hyperinflation) as the game progresses. The growth rate algorithm for NFT is pioneered by Crypto Kitties and developed more maturely in Axie Infinity and Zed Run.
Source: outlier ventures
Games Helpling NFT to Generate Revenue
Players can earn revenue from battles in Axie Infinity and racing in Zed Run, which are generated through interactions with NFTs. Like YGG engaging in, NFT that generate cash flow can be used for leasing or loans. In contrast to art and collectible NFT, the game creates scenarios of use and utility for NFTs, increasing the fundamental value (user value) of NFTs.
The purpose of promoting NFT is making virtual items truly property-based. The ownership of items in centralized games is actually held by the platform, while in blockchain games, players hold the ownership of crypto assets because smart contracts are transparent and not modifiable, and assets that players breed with them as well.
… Democratizing property, not by abolishing it but by popularizing it so that every citizen can become an owner without exception, which is much easier than people think. In other words, to learn how to create and distribute wealth, people should combine material grandeur with moral grandeur.
~ Victor Hugo, Les Misérables, 1862
Here is a practical analysis of the current performance of Axie Infinity, the first popular P2E blockchain game.
Cost of Entry Continues to Rise
Axie Infinity marketplace is the main channel for players to enter and buy it. The game mechanic is buying three Axies to form a team and start making money.
The current market price is changing very fast, the price of Axies is about $250 around July 8th, $350 on July 12th, and basically rose to $450 on July 14th. Because of the rapid growth of the number of players and the impact of the SLP rise, Axies return cycle will be rapidly reduced, in turn affect the price of Axies. The current cost of entry is about $1300.
Source: Axie Infinity
Rising Breeding Costs
The single-day volume of Axies started skyrocketing around May 1st of this year. Because the platform officially completed a technical upgrade on April 28th, and the game was migrated from ETH as a whole to Ronin, a self-developed sidechain (with this change, no additional Gas fees are paid when playing the game and any earnings were realized in seconds).
Total reproduction cost = fixed cost (not related to the number of reproduction, pay ETH or AXS) + variable cost (related to the number of reproduction, pay SLP)
Until now, the fixed reproduction cost has gone through 3 phases.
Phase 1: Axie Infinity runs on ETH network in April and only needs to pay GAS fee, not AXS.With the ETH price and GAS fee at the end of April, the cost of GAS fee for reproduction is 2500*0.005=$12.5
Phase 2: After transferring to the Ronin chain at the beginning of May, no GAS fee is required, but 2 AXS is required.
10*2=$20
Phase 3: At the beginning of July, the propagation fee is changed to 4AXS and the AXS price increases.
20*4=$80
From the player aspect, the shift from the ETH main chain to the Ronin chain does not reduce the cost of reproduction, but rather further pushes up the cost of reproduction as the price of AXS increases. Just percentage of reproduction cost is gradually shrinking as the price of Axies increases.
In the game, the number of SLPs paid differs according to the number of breeding. According to the SLP price of $0.3, each breeding needs to pay the cost of SLP ranging from $30–510.
Source: Axie Infinity
The Return Rate Remains Extremely High
There are three sources of in-game revenue, and daily SLPs (Small Love Potions) and Axies breeding for sale being the main sources of income, and the other is AXS tokens (platform governance tokens) earned through monthly ranking matches.
Daily tasks are fixed with a reward of 50 SLP, daily matchmaking can earn 80 SLP based on a 50% win rate, and up to 100 SLP can be earned daily through the story mode. If players are professional with pets and skills, they can earn about 130–230 SLP (floating) by playing the game for about 2 hours a day, which may take three hours if players are not skilled.
A season system was set up to motivate players to invest more by issuing AXS as a season reward every month. The corresponding game rewards are (1000 WAXS = 1 AXS).
Source: Axie Infinity
A total of 9350 AXS are issued for each season, which is equivalent to $187,000. Since only the top 300 players in a season can get AXS, most players do not get that part of the revenue.
Source: Axie Infinity
According to the analysis of the trading behavior of Axies in marketplace, most players breed for sale and sell fewer Axies due to the higher cost of breeding for those with more than 4 times. Therefore, it is possible that most players choose to breed no more than 4 times. And then, if players choose to breed once every 5 days and stop breeding after 3 times, and after that, the SLP gain is only obtained through battles and quests, and the daily SLP gain is assumed to be 150. This is used to calculate the player’s rate of return.
Source: Delphi Digital, Axie Infinity
Gain of breeding for the first time: 450–100*0.3–420=$340
Gain of breeding for the second time: 450–200*0.3–420=$310
Gain of breeding for the third time: 450–300*0.3–420=$280
Revenue of SLP within 15 days
The cumulative gain in 15 days was $1,605, which basically exceeded the cost of input.
No more reproduction by default after 15 days, only revenue generation through SLP.
The combined Axies sale and SLP revenue yields an annualized return:
（(（340+310+280）+（365–15）1500.3)/1400–1）*100%=1091%
This yield can fluctuate significantly with the price fluctuations of SLP and Axies. However, based on the current annualized yield of 11x, the model of Play to Earn is significantly attractive compared to physical miner mining and DEFI liquidity mining. Therefore, this model will attract some of the original mining funds.
Vault Economy (A way to protect AXS prices)
4.25% of market transactions and all reproduction fees will be put into the community vault, which will be jointly distributed by AXS holders.
Source: Axie Wrold
Based on the current incremental rate of the community vault, AXS holders will be entitled to allocate huge amounts of funds in the future. In addition, more AXS will be deposited after the staking incentive takes effect, which will effectively support the AXS currency price, and even if the DAU reaches a certain bottleneck in the future, resulting in SLP over-issuance, AXS will get some buffer space.
Land Economy (Future Development Potential of the Game)
In addition to Axies, the game also has another kind of land NFT, a total of 90601, which is similar with Axies, players can directly trade in Marketplace with ETH, owners of the land can also get the rewards inherent in the plot, such as AXS tokens, etc. In addition, players can build their own house through the SDK (map editor) on the owned plots of land, and buy material upgrades or decorations in MarketPlace as well, which is one of the methods that Axie Infinty to become metaverse in the future.
Source: Axie Infinity
Does Axies Supply Exceed Demand?
The supply and demand of Axies is highly related to the robustness of the whole game economic system. If high levels of Axies without new players, price of Axies will fall, which in turn will affect the demand of SLP and AXS, but due to the infinite incremental property of SLP and the lack of corresponding deflation mechanism besides breeding, SLP will be severely inflationary and will eventually cause the collapse of SLP price.
Due to the design of the mechanism that each person holding three Axies can play the game, it is considered that the overall Axies to DAU ratio should be more appropriate between 4 and 5. The following data will be retraced for the past two weeks.
Source: [twitter.com/Maxbrand99]
Taking the average value of the last two weeks’ data to calculate the growth of Axies in the future period. The number of Axies on June 28 is 1.15 million, and 1.5 million on July 5, with a growth rate of 30.4%; the number of Axies on July 12 is 1.96 million, with a growth rate of 30.6%. Taking 30.5% as the recent growth rate, then the number of Axies on July 19 (one week later) is about 2.55 million, and the number of Axies on July 26 (two weeks later) is about 3.338 million.
Source: [twitter.com/Delphi_Digital]
According to the performance of DAU data, DAU on June 28 is 250,000, on July 5, it is 350,000 with a growth rate of 40%; DAU on July 12 is 500,000 with a growth rate of 42.8%; we take 41% as the recent growth rate, then the DAU on July 19 (one week later) is about 705,000 and DAU on July 26 is about 994,000.
Based on the above data we can get the conclusion:
If the recent growth in the number of Axies and growth in DAUs is maintained, the ratio of Axies to DAUs will continue to decrease in the coming period, leading to a further increase in the price of Axies, forming a positive cycle with the price of AXS and SLP , further pushing up the overall price. From the data, the supply and demand relationship of Axies is still relatively smoothly.
However, it is difficult to maintain such a high growth rate of DAU as the entry barrier gradually increases, and players will look for games of the same genre but with a lower barrier. These factors will have a dampening effect on the growth rate of DAUs, but the reproduction of Axies will maintain a certain inertia and will continue to grow exponentially, eventually leading to supply exceeding demand. In order to keep the axis economic system robust, the development team needs to continually grow users, create new demand, and maintain the ability to dissipate within the system.
Competitive Analysis
According to Warren Buffett’s moat theory, the moat of a company mainly comes from four aspects: intangible assets (brand, patent, team), network effect, conversion cost and cost advantage.
- Brand: Axie Infinity is a phenomenal product, including its investor Animoca and guild YGG have formed a certain brand among competitors.
- Team: The playability of the game, the design of the economic model, and the operation ability reflect that the team has strong strength.
- Network effect: Axie Infinity already has 500,000 DAUs and keeps spreading very strongly with the help of guilds. The three-tier structure of “guild-manager-player” adopted by the guild has the potential to become viral expansion , which helps to enhance the network effect.
- Conversion cost: The conversion cost of traditional online games is low. Considering that Axies have certain nurturing attributes, players may have affections for their Axies, so conversion needs to pay certain emotional cost to leave. Axie Infinity can also increase the conversion cost of players through the expansion of the economic system.
Industry Concentration
According to the traditional gaming industry, the maginitude of concentration will be like: DEX>LEND>Games. It is very possible for many game projects coexisting within the industry.
Summary: Can the Play-to-Earn Keep Developing?
The P2E model works in the traditional game industry, and the blockchain game has given it more power. Take Axie Infinity as an example, the ultra-high yield attracts many deal-hunters, and if the yield drops, it will lose these players and reduce the buying power of Axies, AXS and SLP in the secondary markets at the same time. The high levels of multiplication rate and the rise in currency prices raises concerns about who is going to support the value of these virtual assets. The answer is simple, the players who are willing to pay in the game will support it. In the traditional game industry, 5% of the players have high ARPU and support the game development and operation costs. Even if there is a short-term bubble burst because of game downtime, reduced deposit, over-breeding and other problems, it is only a short-term issue. If the game can attract enough consuming players, it can support the long-term operation. With the development of blockchain games, there will still be a gradual trend of lower yield and higher playability, and forming a healthy balance eventually.
Reference
- Yield Guild Explains: Play-to-Earn and Scholarships | by Yield Guild Games | Yield Guild Games | Jul, 2021 | Medium
- What’s the Play-to-Earn Business Model? — Play to Earn
- Understanding P2E 2.0: Axie Infinity Deep Dive | Outlier Ventures
- Yield Guild Games Whitepaper: Four Big Takeaways | by Yield Guild Games | Yield Guild Games | Jun, 2021 | Medium
- [Public] YGG White Paper FINAL (yieldguild.io)
- Amy Wu 在 Twitter: “1/ After spending more time in the @AxieInfinity ecosystem, I feel that the heart of the play-to-earn (P2E) model lies in the new guild system, like @YieldGuild” / Twitter
- P2E 2.0 — A new economic model for gaming based on crypto tokens | Outlier Ventures
- https://outlierventures.io/research/p2e-2-0-a-new-economic-model-for-gaming-based-on-crypto-tokens/)
