In 2018, Vietnamese game creator Sky Mavis launched Axie Infinity, a Pokemon-like game universe in which players acquire and battle digital pets called Axies. The game took off in developing countries such as the Philippines, promising more money than many could make in their day jobs and popularizing play-to-earn as a business model. To date, the game has earned over $4 billion in NFT sales. However, the startup’s recent $600M+ hacker attack represents a financial blow to an already struggling in-game economy.

In recent months, Axie Infinity has dealt with declining token prices and sales volumes, leading to questions over the sustainability of its business model. Meanwhile, venture funds (Framework Ventures; FTX, Solana Ventures and Lightspeed Venture Partners; Polygon and Seven Seven Six) are plowing hundreds of millions into blockchain gaming.

In this post, I break down three key questions:

1. What is Play-to-Earn Gaming?
2. How Does Axie Infinity’s Economy Work and What Are Its Shortcomings?
3. What’s Next for Blockchain Gaming?

What is Play-to-Earn Gaming?

Play-to-earn is a new business model that rewards players for time and investment spent in a game. While app stores and publishers traditionally take 50% plus of game revenue, play-to-earn games enable players to share in a game’s success through earning in-game currencies and trading in-game assets. Advantages of play-to-earn gaming over classic gaming business models (e.g., upfront purchase, freemium, subscription) include:

• Asset ownership and transfer: Players are able to monetize their investment in a game. Further, players can sell their inventory if they choose to stop playing.
• User acquisition: Token incentives bootstrap early community building, solving the cold start problem.
• User participation: Through player-owned economies, players get to participate in the economic upside of the game. In addition, ownership can provide governance rights that enable a stake in the direction of the game. However, securities law may limit what is possible (e.g., recent SEC investigations).
• Composability: Smart contracts enable adaptations and additional features to be built on top of games (e.g., financialization offerings).
• Interoperability: Permissionless interoperability can extend utility beyond the immediate game. While there are some examples (e.g., Ubisoft creating a league with Sorare’s cards), this can be limited in practicality due to games heavily controlling their IP rights or effectively becoming walled gardens.
• Transparency: Key financial data has the potential to be shared openly, increasing player trust.

How Does Axie Infinity’s Economy Work and What Are Its Shortcomings?

Per Axie Infinity’s whitepaper, the game has a “100% player-owned, real money economy.” The economy consists of two tokens, Axie Infinity Shards (AXS) and Small Love Potions (SLP) along with NFTs that represent in-game characters and virtual real estate. Players make SLP by defeating other players in battle and trading in-game assets. In addition, Axies can be “bred” together to create new Axies that can then be sold to other players for profit. The protocol takes a 5.25% fee (previously 4.25%) on marketplace transactions, which are directed to the community treasury, with the remaining ~94% of revenue going to the seller and 1% to content creators (if applicable).

To start playing the game, players need to buy three Axie Infinity characters. As of May 2022, they cost ~$20 each, but the average Axie has cost as much as ~$500 each in the past. Given the high entry cost, guilds (Yield Guild Games, Ready Player DAO) emerged to lend players the NFTs needed to play the game in exchange for a cut of their winnings.

As gaming research and consulting firm Naavik wrote, Axie Infinity’s business model “depends on continued growth in its user base and continued fresh money entering the system to prop up the value of Axies, $AXS, and $SLP.” Once new player growth and capital inflows dried up, Axie Infinity’s financially-driven players started leaving given declining profits. As players cashed out rather than re-invested in the game, Axie Infinity’s economy became plagued by SLP inflation.

In February 2022, Sky Mavis announced measures to address the “very high” inflation of SLP with “around 4x more SLP being created (supplied) per day than burned (demanded) through breeding.” First, the game creator eliminated earnings from adventure mode (previously contributing to ~40% of SLP creation) to refocus SLP earnings on incentivizing skilled gameplay. Second, Sky Mavis revamped the PVP Rewards structure, expanding the leaderboard to 300,000 slots (previously 1,000) and increasing the prize pool to 117,676 AXS (previously 3,000). Further, Sky Mavis increased utility for weaker Axies, adding 1 SLP per win for lower ranked players (under 800 Match Making Ranking). Finally, the game creator announced increased burn mechanisms (e.g., special cosmetics and skins, upgraded Axie body parts, in-game emojis).

The game’s future sustainability depends on it appealing to players seeking to have fun, not just looking to turn a profit. In April 2022, Sky Mavis launched a global early access release of a free-to-play version, Axie Infinity: Origin, to tackle this problem. The “more fun, beautiful, and engaging” version of the game aims to draw in more players. Players are provided three free non-NFT starter Axies to experience battle gameplay, but without SLP and AXS awards. After the early access period, Sky Mavis plans “to launch Origin on Android and iOS apps stores and will work towards a full launch that incorporates SLP rewards, NFT Runes / Charms, and have official Seasons.”

What’s Next for Blockchain Gaming?

While blockchain gaming captured 49% of blockchain usage in 2021, it was a niche part of the ~$180B global game market. However, industry forecasts project the blockchain gaming market to grow to a $40B market by 2025. So, how can blockchain games capture this investment opportunity? Below are my predictions for the future, leveraging insights from 15+ founders, investors, and experts in blockchain gaming as well as countless blog posts, Twitter threads, and podcasts:

‘Fun’ games

While early play-to-earn games have catered to financially focused users and offered less than stimulating gameplay, future blockchain games promise to improve the mode. As Quirky Qwerty points out, more players playing for the love of the game than to earn is critical for a game to be successful in the long-term. I believe the next set of winners in Web3 gaming will attract and retain players through developing high quality, complex, and skill-based gameplay. I’m watching AA/AAA game developers and industry veterans taking advantage of the unprecedented opportunity for indie studios in Web3 (Trailblazer Games, Illuvium, Aurory, Neon Media) as larger studios are more hesitant to enter the space (e.g., Electronic Arts, Ubisoft). I’m also excited about games that embody Li Jin’s super-fan thesis, monetizing passionate communities (e.g., ZED Run for horse racing aficionados).

Long-term sustainable tokenomics

I expect continued innovation and experimentation in creating sustainable play-to-earn economies that encourage long-term engagement from loyal players. As Nat Eliason of Crypto Raiders explains, “the primary revenue driver should be in-game activity amongst existing players.” This prevents game dependence on attracting new players, a key issue Axie Infinity has experienced. As Derek Lau of Guild of Guardians writes, one potential solution could be utility tokens for minting in-game NFTs. Then whenever these utility tokens are spent, they could be sent to a collective rewards pool and redistributed in-game via staking (e.g., $CHILL offering in-game utility for Chillchat). Further, a free-to-play-to-earn business model as described by Mason Nystrom could be one way to sustain a robust economy that’s more compelling for mainstream gamers (e.g., Faraway's Mini Royale graduates players from free-to-play to a more economic strategy oriented game). MapleLeafCap outlines additional ideas for economic sustainability, including pursuing external partnerships to stabilize or stimulate the in-game economy and obscuring and capping ROI on gaming assets - approaches that I find especially compelling.

Gamer engagement and decision-making

I’m excited by games taking advantage of the user-generated content and governance/DAO participation possibilities enabled by blockchain technology. Axie Infinity plans to release the Lunacia SDK enabling users to create extensions to the game as well as become a decentralized organization governed by AXS holders. As Packy McCormick writes, “turning Axie Infinity into a platform, and one owned and governed by users at that, can create stickiness via network effects and high switching costs, as platforms are wont to do.” While it is to be seen whether Axie Infinity can effectively execute on this goal, I expect other Web3 virtual worlds and games to iterate on achieving the same mission (recent examples include Yuga Labs’ ApeCoin DAO and Wilder World’s DAO System).

Real-world integration

I see opportunity to leverage play-to-earn incentives to gamify real-world activity in a way that Web2 could not. Fitness (STEPN, Genopets, Step App) and education (proofoflearn, letmespeak) are two specific areas I’m watching. As with play-to-earn games, it will be important that these applications develop sustainable economic models.

If you have feedback/comments or want to exchange thoughts on blockchain gaming, I’m excited to chat!