Eight months ago, Toronto-based management consultant Ansel Gravelle stumbled across a video game called Axie Infinity, which promised to pay players cryptocurrency for fighting digital monsters. After paying the $1,000 entry fee and playing for over a month, Gravelle realised he could make more money another way.

Alongside a friend, the 24-year-old launched a company in July that offers “scholarships” to finance players who cannot afford Axie’s entry costs, taking up to half of their earnings in exchange for access to the game.

“Once you have the capital, you can put out a scholarship in a matter of hours,” said Gravelle. He hopes to start working full time on this business, called AxieFacts, from January.

Gravelle is hardly alone — more than any other application, Axie and its competitors have become the most popular gateways for introducing the general public to cryptocurrency markets, laying the building blocks for new online worlds and financial systems powered by tokens that trade on digital ledgers. The game has spawned an entire economy, replete with businesses like Gravelle’s that rely on it to survive.

Axie, which is loosely based on the Pokemon franchise, rewards players with tokens for winning battles and completing quests.

Many players in developing countries rely on wealthier benefactors to pay the game’s entry cost of three monsters, or Axies, non-fungible tokens that can be freely bought and sold on exchanges. Sponsors typically take 30 to 50 per cent of a player’s earnings.

Players can also use tokens to breed new monsters, which can be sold to new players looking to enter the game.

But video game analysts have recently begun questioning the sustainability of Axie’s economy, which largely relies on new player growth to remain in balance.

While video games have long incorporated their own currencies, Axie and other cryptocurrency-based titles allow players to convert their in-game assets into real cash through officially sanctioned channels. That feature creates the risk that players will cash out the majority of their winnings instead of recirculating them through the game economies.

Sky Mavis, the company that developed Axie, has recently tried to stem a freefall in the price of Smooth Love Potion (SLP), a cryptocurrency token players earn within the game.

Increasingly, players have chosen to exchange the SLP tokens they win in the game for local currencies instead of ploughing them back into breeding new monsters to sell to other players, the game developer said. This has contributed to a glut of depreciating SLP tokens in the game.

Chart showing 180-day price of Smooth Love Potion in USD

The slump has impacted players in developing countries such as the Philippines who joined Axie after early users boasted of quitting their jobs to earn money from the game.

In the past three months, all but the most experienced Axie players have earned below the average daily wage in the Philippines, according to an analysis by the video game research firm Naavik. Some low-skilled players dropped below the minimum wage beginning in September, after factoring in the cut taken by sponsors.

Sky Mavis said that during the pandemic the wages from the game served as “a lifeline for hundreds of thousands of people in the Philippines”, and argued that the Naavik report “discounts the community too heavily and focuses on the players that play Axie solely to earn an income”.

The number of Axie daily users increased by more than four times in under three months to 2bn in October, according to figures released by Sky Mavis. Analysts have now begun watching for signs of slowing growth.

“They could have 50bn [users], but if the growth line is flat then income is not being generated,” said Lars Doucet, a video game consultant who co-wrote the Naavik research paper.

Axie’s performance could have big implications for dozens of start-ups that have raised money from venture capitalists to create games rewarding players with potentially lucrative cryptocurrency tokens. More than traditional titles, the games have forced developers to also act like central bankers, making tweaks to control inflation and other economic variables.

Sky Mavis has acknowledged that Axie relies on new entrants for growth and promised to release new features that will make the game more desirable for people who are not primarily motivated by cashing out their earnings.

Axie’s biggest backers have promoted an optimistic vision for the game, pitching it as an antidote to the economic models of traditional games because it is paying people to play. In October, Andreessen Horowitz’s cryptocurrency fund made one of its largest investments to date in Sky Mavis, leading a $152m financing that valued the company at $3bn.

“What we’re going to see from here is an incredible growth in the number of people who actually do work in the metaverse,” said Arianna Simpson, a partner at Andreessen’s cryptocurrency fund, referring to a burgeoning group of virtual worlds.

Sky Mavis plans to sell more than 90,000 plots of virtual land in the game that can be traded as non-fungible tokens, and will allow outside developers to create new games in the Axie universe.

Sky Mavis, which takes a 4.5 per cent cut of transactions within the game, has made about $1.2bn of revenues, almost entirely in the past year, according to the data provider Token Terminal. The developer has promised to hand over the keys to the treasury to the game’s players, although it has not laid out an exact timeline for the transfer.

Meanwhile, a cottage industry of financial sponsors has made some of the biggest rewards from the game’s surge in popularity.

A token issued by Yield Guild Games, an early sponsor of Axie players in the Philippines, has risen to a market value of nearly $800m in a matter of months. YGG, which has also raised money from Andreessen, owned almost $850m of assets largely tied to Axie and other cryptocurrency games as of September.

The potential for future earnings led Akhil Jindal, an engineer and computational scientist, to drop out of a doctorate programme in the Boston area this month to start a cryptocurrency gaming partnership, Proof of Game.

Proof of Game sponsors more than 700 players in Axie and similar games, according to its website, which says the company aims to promote “positive, empathetic, and responsible citizens of the metaverse”.

“This is a speculative social experiment,” Jindal said. “If it works, it will be game changing, and if it doesn’t work, then there will be a lot of lessons to be learned.”

Aleksander Larsen, co-founder of Sky Mavis, said Axie had not yet experienced an increase in players quitting the game.

Axie Infinity Shards (AXS), different in-game cryptocurrency tokens that represent an ownership stake in the game, have soared to a total market value of $8.8bn as speculators clamour for a piece of its growth. Sky Mavis owns about 20 per cent of the AXS tokens.

“I think we’re going to continue to shock the world with what’s possible with this cute little pet game,” Larsen said. “People have never seen anything like it before.”

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