Axie Infinity’s P2E system and its dilemma

Axie Infinity, an NFT game inspired by Pokemon Go, in which players collect and battle monsters has become the biggest NFT game in the marketplace during the pandemic. Its business model is called “play to earn” whereby players are incentivized by cryptocurrency rewards. 

This play-to-earn game from indie studio Sky Mavis reached peak popularity in early 2021 when players started flocking to it as an attractive source of  alternative income. The game recorded at least 1.8 million daily active users and daily sales volume reaching up to US$33 million in August 2021.
 

Axie Infinity remains one of the most popular P2E NFT games on the scene, it has its issues. Smooth Love Potions (SLP) – one of the game’s tokens, has been performing poorly in markets and trading volumes are not as high as they once were. 

The Tokenomics of Axie Infinity 

Joining Axie Infinity is a fun way to enter, understand the crypto world but requires players to chip in with a little investment. Players must buy (or borrow) at least three NFT Axie monsters upon joining the game. Currently, the lowest priced Axie costs US$31 while on average they cost around US$355. The economic activity in Axie Infinity depends on battles and breeding.  

Once in the game, players are introduced to the game’s tokens; Smooth Love Potions (SLP) and Axie Infinity Shards (AXS). SLP is an in-game currency awarded to players and can be traded for cash on crypto exchanges – which serves as the earning avenue in the game. AXS is only awarded to a handful of top competitive players, and the only other way to obtain it is through purchasing them.

New Axies are bred and can be sold to newer players looking to join the game, other players, otherwise kept by its original breeder.

What is Smooth Love Potion (SLP)?

To understand the current predicament of the SLP, a few points have to be kept in mind.
 

SLP is an uncapped utility token, meaning the currency can be generated infinitely and its supply grows as more players join Axie Infinity. It is available for purchase as an ERC- 20 token and is listed on Binance exchange. While players earn SLP mainly through completely daily quests, battle players in the Arena (PvP) or fight in the Adventure mode (PvE) in Axie Infinity, breeding is the main way to burn SLP (take SLP out of circulation), a process whereby players must spend at least 100 SLP to start the game. Notably, the amount of SLPs rewarded to a player depends on their matchmaking ranking and or their MMR (Axie’s power). Therefore, the higher the player’s level, the higher the amount of SLP the player will be rewarded with. 

Understanding Axie’s SLP crash 

As aforementioned, Axie Infinity’s play-to-earn system attracted many players looking for an additional source of income, especially in developing countries. Currently, the Philippines holds the highest concentration of Axie Infinity players at 40%, closely followed by Venezuela, who has the highest annual inflation rate in the world according to the World Bank. And empowered to earn money through cryptocurrency rather than their depreciated local currency.

Due to the relatively high cost of entry into the game, players from these countries resort to “scholarships”, a way of staking players who do not have the financial means to enter the game. Players with many Axie monsters (also known as Managers) rent some of their Axies (called Scholars) for a cut of their borrower’s SLP tokens earned in the future.

Unlike the Managers, many Scholars do not care about playing more competitively or breeding new Axies, and they are content with grinding for SLP and selling them off on exchanges. However, this arrangement only makes sense for both parties when SLP is valuable.
 

A huge proportion of this type of player in the game easily destabilized its economy. As breeding was the sole method of removing SLP from circulation, with very few players breeding Axies (comprising only 5% of the overall players), coupled with SLP’s unlimited supply, the game economy was producing way more NFTs than it was spending.

In turn, triggering an excessive supply of SLP, and the plummet of its value. The value of Axie Infinity’s SLP fell from $0.40 last summer to around $0.01 last month. As SLP’s prices on exchanges dropped, these players started to leave the game, looking for more lucrative alternatives.

The way forward

To tackle the risks associated with price volatility, developers Sky Mavis announced upcoming features which could help stabilise the game.

Plans in the offing include the revamping of the current battle system, an introduction of a new game mode involving the in-game land assets, and a new ability to upgrade Axies. All these features will likely require SLP tokens, and would offer new ways to remove the tokens from circulation.

The game developers are also working on lowering entry barriers to the game to attract new players through the introduction of  new “starter” Axie characters to enable players to join the game without investing in Axies from the get-go.

Photo: Axie Infinity