Axie Infinity: Investing in a Digital Nation 💰🌐
Investing in Axie Infinity, the ship to the Metaverse.
Table of Contents 🕹️
Axie Infinity 🎮
In-game Economies, IRL Impacts 🌐
Axie Infinity as a Financial Asset 💰
Boarding the Salimbal ⛵
Further Down the Rabbit Hole 🕳️
It should be noted that children at play are not playing about; their games should be seen as their most serious-minded activity.
— Michel de Montaigne
I. Introduction 👾
In Filipino mythology, the noble hero Agyu, from the epic Olaging and Ulahingan from Mindanao, flies on a golden ship called Salimbal that can accommodate his whole tribe for travel to the Kingdom of Nalandangan; the place wherein Agyu is destined to rule together with the Adtulusan. The Salimbal ship is a transport to a hidden kingdom of the skies.
The Metaverse is a kind of parallel universe to the physical realm, a holographic kingdom floating atop our digital infrastructure. The only way it can reach its full potential as a burgeoning digital multiverse is if we strive to onboard people from across the world into its culture and economy.
In this context, Axie Infinity is the Salimbal to the Metaverse. It’s a transportation device for millions of players from across the globe to the hidden kingdom, allowing an escape from their physical environs and the decaying infrastructure of 20th century nation-states.
Long-term readers of this publication will know our adoration for Axie Infinity. The second issue ever released was on Yield Guild Games, the natural formation of in-game economies, and how gaming is a Trojan horse for widespread crypto adoption. The recent success of Axie Infinity necessitates a return to the topic to highlight how more and more people are boarding the Salimbal and opting out of the constraints of their local economies.
This issue will focus primarily on the economics and financial considerations of investment within Axie Infinity. The goal is to show how community-based economics, crypto assets, and play-to-earn gaming all combine to create a unique investment opportunity in part of the infrastructure of the early Metaverse.
Note: Consider this a guide to begin your research. This is not investment advice.
II. Axie Infinity 👾
Axie Infinity is a Pokémon-inspired universe where anyone can earn tokens through skilled gameplay and contributions to the ecosystem. Players can battle, collect, raise, and build a land-based kingdom for their pets.
Axie Infinity is a blockchain game on Ethereum that uses the Play-to-Earn model to incentivize ecosystem growth. There are a few different ways to earn income from the game, but the primary way is to battle digital pets to earn Small Love Potions (SLP), an ERC-20 token that is tradeable on decentralized exchanges like Uniswap.
In addition to battling, players can breed and sell Axies. The economics of breeding is discussed in more detail below, but suffice it to say for now that breeding has been particularly lucrative of late as more and more players seek Axies to begin playing.
The game was launched in 2018 and has since grown to become one of the largest Ethereum dApps by revenue. The growth over the last couple of months is particularly staggering as revenue has gone parabolic, outpacing even Uniswap in cumulative total revenue over the past 30 days.
Over the past week, it generated more fees than Ethereum and Bitcoin:
III. In-game Economies, IRL Impacts👾
Before we can understand Axie Infinity as a financial asset, it’s important to consider both the in-game economy and the global macroeconomic backdrop.
As outlined in the following section, Axie Infinity can be quite lucrative for the average player. Typically, a player can expect to earn roughly $300-$500 a month playing the game depending on the price of $SLP. Through the end of June, the average monthly income assuming one sold their $SLP everyday at the daily close is ~$500 YTD. To some, this amount is relatively minimal, but to many around the world, this amount can be life-changing.
By now, it is likely you’ve seen the Leah Callon-Butler article (or the recent follow-up), the Play-to-Earn documentary, or our own article on YGG discussing the impact the game has had on the lives of Filipinos during the 2020 Covid-19 lockdowns. If not, definitely check them out as it is quite amazing to see the power of a blockchain game on the lives of those from under-developed regions of the world.
The largest drivers of this trend is the permissionless nature of decentralized systems, the low barrier to entry (a cell-phone and an internet connection), and the available income relative to average earnings in developing countries. At current prices, Axie Infinity offers a higher salary (~$22k per year annualized at the time of this writing) than the minimum wage in most countries. The hours are better, the work can be performed from anywhere, and there are no legal or regulatory hurdles to jump through.
Excerpting from our Yield Guild Games article:
Global labor arbitrage is an economic phenomenon that occurs when frictions to international capital flows are removed. Without frictions, labor capital tends to migrate to nations with higher-paying jobs.
What happens when a virtual, 24/7 Metaverse accessible via mobile phone and an Internet connection creates better employment opportunities than what is available in one’s physical environs? Labor capital will migrate.
Turning to the in-game economy, Axie Infinity primarily consists of the following major assets:
Axies - Digital pet monster ERC-721s that are used for battling and breeding. Each Axie can be bred up to 7 times, with an increasing cost for each subsequent breed in order to combat hyperinflation of Axies. Axies come in a variety of types with skill sets and body parts that differ in utility and rarity.
Smooth Love Potions ($SLP) - An ERC-20 utility token that can be used to breed Axies. $SLP is earned by winning battles and adventures in-game. There is no supply cap, but certain in-game restrictions seek to limit hyper-inflation (e.g. daily energy restrictions).
Axie Infinity Shard ($AXS) - An ERC-20 token that will be used for governance as Axie Infinity progresses toward further decentralization. In addition to its governance voting capabilities, $AXS will also have a staking mechanism that will allow stakers to capture a portion of both the treasury revenue and inflationary rewards.
Land - Land units are ERC-721 NFTs that can be bought and sold on the Axie Infinity marketplace. Land is available in five different types of increasing quality: Savannah, Forest, Arctic, Mystic, and Genesis. Land gameplay has not been released yet, but it is expected to come out this year.
These assets fuel the Axie Infinity economy. As a play-to-earn game, players can earn $SLP from battling in PvP and PvE modes, which can then be used to breed new Axies. The utility of $AXS via both the staking mechanism and as an input into breeding costs creates a benevolent feedback loop as more players enter into the economy.
One of the largest considerations for Lunacia, the world of Axie Infinity, will be long-term sustainability given the inflationary mechanics of Axie population growth. This was addressed recently through a new addition to the Axie Infinity whitepaper. The crux of the problem is summed up nicely there:
Axie population growth is a major factor within the Axie ecosystem. At any given moment, there exists some ideal inflation rate that allows us to grow to our maximum potential. Too slow and Axie prices are too high for everyday people to join; especially competitive Axies. Too fast and you get unhealthy inflation.
The main way of addressing this is through the modification of game mechanics to create alternative incentives to breeding.
Existing limits on breeding and the introduction of raw inputs (i.e., $SLP and $AXS) already helps to dampen Axie inflation. Interestingly, $AXS increases (decreases) in price alongside interest in Axie Infinity, meaning the cost of breeding is increased (decreased) at the same time as one would expect more (less) breeding to occur. In other words, natural supply- and demand-based interest rates are effectively introduced.
Beyond these quantitative mechanisms, it’s also possible to introduce alternative incentive changes. For example, in the newly added Whitepaper section, the following ideas are presented:
Adding additional utility to Axies through new experiences such as land, mini-games. This also adds utility to Axies beyond their effectiveness in fleeting metas.
Adding vertical, rather than purely horizontal progression. Right now in order to progress the main path that people take is by expanding the size of their collection. This dynamic is not optimal long term. In the long run there will be upgrades to both Axies AND Land that will require crafting ingredients. Axies themselves may be “released” to obtain these crafting ingredients. This creates a long term supply sink to the Axie population. Axie progression is coming in the future; and it promises to create a much stronger bond between trainers and the Axies they choose to upgrade.
Soulbound Axies, aka non-transferable Axies,that are competitive in the arena will allow anyone to compete and have fun. Earning potential for these soul bound Axies should be zero or close to zero; meaning that of course demand will remain for strong “real” battle Axies. Also keep in mind that demand for Axies is ultimately what also drives demand for SLP (and AXS), so creating more reasons to own Axies and making it easier for us to grow are important in a a healthy economy.
IV. Axie Infinity as a Financial Asset 👾
With a vibrant in-game economy and a favorable macro backdrop, you may be wondering what financial opportunities are present in-game and how it would fit into a broader crypto portfolio.
Exposure to the Axie Infinity ecosystem has been beneficial to a portfolio’s total return YTD. Here are some quick metrics using data from Coingecko through June 30, 2021:
The low correlation to $ETH implies that the Axie Infinity ecosystem is additive to diversification efforts for a portfolio.
Let’s look at some of the ways that Axie Infinity can be used as a financial asset.
Since $SLP is generated through playing the game, the income stream is consistent albeit variable as the price of $SLP fluctuates. Assuming one harvested an average of 200 SLP and sold at the daily close each day, income received would have totaled approximately $3,075 (excluding gas costs) through June 30th for a single team. While this isn’t much for some, it explains why individuals from regions like the Phillipines have flocked to the game.
$SLP income can be amplified for larger investors through the use of a scholarship program. Scholarships are a way of providing new players a chance to try out the game and/or earn $SLP before purchasing their first Axies. In exchange for them using the assets, the scholarship manager receives a portion of the $SLP. Yield Guild is currently the leader in scholarships:
YGG recruits existing members of the community as our “scholarship managers”, who recruit and train our Axie “scholars” or players that are leasing Axies from the guild. Each manager recruits players from their respective sub-communities, trains them in how to win games in Axie Infinity, and starts them on the road of earning SLP for their families. This program is managed via bots that interact with smart contracts in our Discord server, automating the process of lending out the Axie NFTs and the revenue share of SLP between the scholar, manager, and the guild.
Institutional investment in scholarships is discussed in more detail below.
Breeding can fluctuate in economic feasibility due to the costs of gas, $SLP, and $AXS, but as of late it has been the primary driver of Axie Infinity’s growth. This comes largely as a result of the migration to Ronin, the side-chain developed by Sky Mavis which has 100 gasless transactions per day.
Total breeding cost is 4 $AXS plus an amount of $SLP determined by the breed count of each Axie in the pair as listed below:
A small-scale breeding operation may see players accumulating $SLP in-game and combining it with a small purchase of $AXS in order to breed their digital pets. With the current Axie floor at 0.12 ETH ($230 as of the time of this writing) and the cost of the first breed at 300 $SLP + 4 $AXS (or approximately $164 total as of the time of this writing), even a poor breed can result in a small gain. Remember to factor in depreciation of the Axies you are breeding given the decreased breed count. Also of note, siblings and parent/child pairs can not breed together, so there is a need to continuously reinvest in order to acquire new Axies.
Larger scale breeding operations require either a large purchase of $SLP on the secondary market or utilizing a scholarship program to reach a point of sustainability. Again, this is discussed in more detail below with regard to DAO treasury management.
Delphi Digital made a splash late last year after announcing a purchase of 5 Axies for 473.5 ETH , or $159k at the time. The Axies they purchased were Origin Axies, a subset of the Axie population with a fixed supply of 4,088, that had rare Mystic parts.
When Origin Axies are created by redeeming Axie Origin Coins ($AOC), they have a chance of being born with one or more Mystic parts. For reference, each Axie has six body parts that determine what skills they have in-game. Mystic parts are not only rare, but they also have utility since they provide access to the most powerful moves in the game.
Collecting rare Axies, such as Origins or the rarer Mystic subset, is definitely a viable investment option as Delphi Digital showed in their own analysis on the topic. Using the Wrapped Origin Axie ($WOA) token as a proxy, YTD performance for the Origin Axie subset is up over +1,100% as of the time of this writing.
$AXS token staking was developed in conjunction with Delphi Digital to foster a sustainable, healthy, and impactful play-to-earn economy. Once staking goes live later this year, $AXS stakers will earn both a staking and a treasury yield.
Staking yield consists of funds that move from the staking multi-sig, which is controlled by the core Axie team, directly to stakers. This yield is subject to the team’s discretion and is used to incentivize staking as needed. Likely this yield will be subject to the control of governance after further decentralization to the community.
Treasury yield consists of funds that are distributed directly from the Treasury to stakers. This yield is a function of network revenue and is intended to replace the staking yield over time as the in-game economy matures.
Delphi Digital’s overview of the staking mechanics highlights an attempt to ensure stakers are rewarded a total yield (base + treasury) of approximately 40% across the first five years.
Lunacia, the world of Axie Infinity, is divided into 90,601 tokenized plots of land. These land parcels will be a key component of an upcoming expansion that’ll see users harvesting resources, crafting ingredients, and upgrading their homestead.
While Land NFTs could be viable as collectibles given their scarcity, they have an additional feature that drives their value as well: income generation.
In the Axie Infinity whitepaper, it is noted that land-owners would expect to generate resources and $AXS on their land. This resource and $AXS generation will produce an income stream to the holder that could be quite notable. Leaving aside the secondary market sales of the accumulated resources, $AXS token issuance has a ‘play-to-earn’ allocation of 20% or 54,000,000 tokens, which is expected to go at least partially to landholders.
It’s too early to say what the sum of this income flow is likely to be, but with $AXS trading near $20 a unit and the popularity of the game reaching all time highs, it could be an interesting opportunity.
Land units have seen strong capital appreciation YTD as well. Axie World shows Savannah lands exchanging hands in early January at about 0.3 ETH. Currently, the Savannah floor is at 3.9 ETH, a +1,200% return in ETH terms YTD.
Guilds as a Treasury Asset
While Axie Infinity is lucrative for the average user, the game can also be used by larger investors, such as DAO treasuries, via the creation of a scholarship program.
Index Coop recently explored using an Axie Infinity gaming guild in partnership with Yield Guild Games as a growth budget initiative for their MVI product. The program outlined in the forum post highlights the economics of the guild as a treasury asset.
In the Index Coop x YGG model, Index Coop, YGG, and the community manager would all receive 10% of the generated $SLP each and the player-scholar would receive the remaining 70%. By purchasing a set of 12 Axies and enough $SLP and $AXS to facilitate breeding, the expected return to Index Coop equated to a 50% APR on the investment.
This strategy does a few interesting things as part of a treasury program:
It generates a diversified and passive income stream for the treasury. The income stream of SLP has a 90-day correlation of 0.34 versus ETH. In addition, the amount of SLP generated is consistent—meaning that a treasury could elect to accumulate it during periods of underperformance between SLP and the base currency and sell it during periods of outperformance. This timing component is reminiscent of timber investments in traditional finance: the ability to harvest the assets is independent of other market conditions. Finally, the stream can also be reinvested to continue expanding the portfolio.
The assets have the potential for capital appreciation. High quality Axies tend to hold their value well in ETH terms, so the initial investment can be potentially retained. Coupled with the ability to later liquidate both the original Axies and the newly bred Axies, the total return profile of an Axie Infinity gaming guild becomes quite unique.
Finally, the treasury asset can be considered philanthropic and an investment in the Metaverse. Organizations like Yield Guild Games specialize in on-boarding players from across the world. Beyond a diversified income stream with potential capital appreciation, a guild can be an investment in both people from economically disadvantaged regions and the infrastructure of the early Metaverse.
It’s our belief that treasuries may look to guilds as they make strategic investments throughout the crypto ecosystem.
V. Boarding the Salimbal 👾
Axie Infinity is interesting because of both its financial incentives and ability to draw in people from around the world via its game. The low barrier to entry and ease of accruing value through gameplay can entice many from outside the crypto crowd into the crypto ecosystem.
Think of it like this: in order to play, players must create a web3 wallet, acquire Ethereum, execute on-chain transactions to purchase their Axie NFTs, and use a DEX like Uniswap to exchange back into fiat. In this way, Axie Infinity is an onboarding tool, the Salimbal of the early Metaverse that transports users into the Web3 kingdom.
As a financial asset, Axie Infinity provides multiple routes to capital appreciation and income depending on what the investor is looking for. It can be a game to earn a little money, a speculative real estate play, or an effective tool to generate revenue on passive assets for a DAO treasury.
The impact of play-to-earn gaming will create one of the largest migrations of labor capital ever via global labor arbitrage. Axie Infinity is an opening salvo showing the world that our games are serious.
VI. Further Down the Rabbit Hole 🕳️
Axie Infinity Announces Delphi-Designed $AXS Governance Token by Piers Kicks
Why We Spent $159k on Digital Battle Pets by Medio Demarco
AXS Staking Overview by Delphi Digital
This issue is sponsored by NFTfi.
NFTfi is a simple peer-to-peer marketplace for collateralized NFT loans. It allows borrowers to put up assets for a loan and lenders to make offers in exchange for interest. The NFT is held in escrow while the loan is active so lenders know for sure that they will either get their money back with interest or receive the NFT in exchange.
If you would like to borrow using an NFT such as an Axie for collateral, you can go to NFTfi and post your desired terms. If someone likes those terms, they can extend a loan to you. Alternatively, if you would like to provide a loan to individuals in exchange for favorable interest rates or the potential of scoring a specific Axie (or other NFT), you can do that too!
See the future of peer-to-peer NFT financing here.
Accelerated Capital is a weekly publication exploring how cryptoassets, DeFi, virtual reality, and other exponential technologies are transforming our economy, society, and culture.
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