Play-to-Earn is the next Liquidity Mining, is Axie Infinity overvalued?
With the development of blockchain games, there will gradually be a trend of decreasing yields and increasing playability, ultimately reaching a balance.This article is from Chain News, authored by Bai Fengxiao and Li Yuanqi, partners and analysts at Foresight Ventures respectively.
On July 5, we mentioned the surge in Axie's NFT sales in our article titled “Axie Infinity Drives NFT Sector Against the Trend | Foresight Ventures Weekly Brief”. Axie Infinity ignited the metaverse track in the following week, bringing a hint of "DeFi Summer" to the crypto market, which remained sluggish throughout July.
We elaborated on the "Play to Earn" model, its rationale, and the new industry it brings, asserting that its model is sustainable in the long term. P2E games are not only disrupting the traditional gaming industry but are also transforming professions primarily occupied by low-income groups, such as Uber drivers.
Finally, through an analysis of Axie Infinity's actual data, we believe that even though the current coin prices may be somewhat overheated, its business fundamentals remain very strong, and in the long run, it will shake up the crypto ecosystem, including DeFi mining.
What is "Play-to-Earn"?
The business model of Play to Earn has long existed in traditional gaming, with games like World of Warcraft and Onmyoji allowing players to earn money by selling equipment or items. In blockchain games, this model has been upgraded, enabling players to earn real money by playing games based on cryptocurrency assets (NFTs). By actively participating in these virtual economies, players can earn rewards such as in-game assets and tokens, which can then be traded or sold on public markets.
This represents a significant shift in the gaming world, as traditionally, in-game asset trading was confined within the game ecosystem, making it difficult for players to trade or sell their digital assets outside the platform.
In developing countries, most people's income sources are limited, but now they can earn more through digital devices and the internet. Players of the blockchain game Axie Infinity in the Philippines can earn around $500 per month, which is 2-3 times the local minimum wage.
From Free-to-Play to Play-to-Earn
Initially, players had to pay for game licenses, but with the advent of the internet era, the free-to-play model gradually developed. The so-called free games allow players to obtain basic gaming experiences at no cost, while advanced experiences or personalized items require additional payments.
Currently, most of the highest-grossing games in the world are these so-called free games. In June 2021, Tencent's Honor of Kings mobile game generated nearly $277 million globally in the App Store and Google Play, a 21% increase compared to June 2020. These free games have earned billions of dollars annually, demonstrating that the free-to-play business model has matured, and developers have mastered the art of monetizing free games.
Source: sensortower.com
We believe that P2E is an evolved version of free games. Blockchain technology grants players ownership of in-game assets and allows them to increase their value through active gameplay, which is a key component of the P2E model. Most of the revenue in P2E games no longer belongs to large centralized gaming companies but is given to skilled players. By participating in the in-game economy, players are creating value for other players and developers, and in return, they receive asset rewards in the game. These digital assets can be any crypto assets that are verified on the blockchain. This is why the P2E model aligns so well with blockchain games.
In fact, P2E games are not necessarily free games. For example, in Axie Infinity, players need to purchase at least three Axies to start playing, which may currently cost hundreds of dollars. We believe this is reasonable. First, the match between input and output is a long-term healthy economic model; second, game development incurs costs. Since players can ultimately gain value by selling crypto assets, it is acceptable for players to pay some startup costs. Conversely, if the game were entirely free, we believe such an economic model would be unsustainable.
P2E Sparks a New Industry
The P2E model driven by blockchain technology is opening up digital-native economic opportunities for a new demographic. Playing games has become more than just a pastime; through daily gaming, players are more like workers, investing time and labor to earn income for their families.
Axie Infinity is a great example. Most importantly, especially during the COVID-19 pandemic, impoverished groups in need of supplementary income often benefit the most. Since part of the mission of cryptocurrency from the beginning has been financial inclusion and the open-source digital economy, it is crucial to bring in those who need it most—P2E 2.0 has finally achieved this. Axie's economic model clarifies how the concept of cryptocurrency transitions from provable scarcity to how monetary policy is applied in the context of play-to-earn.
The P2E business model has also stimulated game developers, players, and ecosystem organizations such as guilds.
Some very powerful guilds have emerged in P2E games, which will play a crucial role in the future gaming industry. Take Yield Guild Games (YGG) in Southeast Asia as an example. They have four main goals:
- Invest in the most profitable NFTs in the metaverse;
- Build a global gaming player economy;
- Generate income through managing and renting NFTs;
- Encourage community participation in the guild.
YGG has established a scholarship program designed with a guild-community manager-scholar structure, where the guild is responsible for nurturing and renting in-game NFTs, lowering the entry barrier for players. Community managers are responsible for recruiting, training, and guiding new players, which is key to Yield Guild's replication, expansion, and success in Southeast Asia.
Through community managers, Yield Guild does not need to directly manage any scholars; they only need to find suitable community managers to collaborate with. The income of scholars is shared, with scholars ultimately receiving 70% of the game income, while the guild receives 10% and the community manager gets 20%.
This is actually a very traditional business model, where capitalists provide means of production to the proletariat, who earn labor income, while capitalists gain the surplus labor value. As long as the game's economic ecosystem is large enough, the guild will gain significant economic value.
Amy Wu mentioned that P2E has created Guild 2.0, which are revenue-generating organizations that not only engage the community but also purchase, nurture, rent assets, and provide job opportunities. They can address the cold start challenges of new NFT games and become dominant new asset buyers (e.g., Axies). Among the 500,000 DAUs of Axie Infinity, most are scholarship earners. For these players, their alternatives are not games like Fortnite; Axie replaces jobs like Uber or Grab.
Is Play-to-Earn a False Proposition?
When I first encountered the Axie Infinity model, I immediately thought of Qutoutiao, one of the three giants in China's sinking market, which adopted a "read to earn" subsidy model. Users of Qutoutiao can earn cash rewards through registration, reading, sharing, and inviting new users. This model once brought rapid user growth to Qutoutiao, allowing it to go public on NASDAQ in just two years. However, from Qutoutiao's stock price and financial data, this model can almost be deemed a failure. Qutoutiao's stock price has fallen from a peak of $18 to less than $2.
Qutoutiao has been criticized for its low-quality user base, which makes it difficult to attract high-quality advertisers. Its users are almost all "wool party" members, who have low demands for news content, leading to an abundance of junk information on the platform. Moreover, these users are not loyal to the platform, making it hard to achieve advertising conversion goals. Therefore, the news business struggles to form a healthy balance of income and expenditure.
At first glance, the P2E model seems similar to Qutoutiao's model, but we believe the P2E model is viable. Qutoutiao's users are funded by advertisers, but due to low conversion rates, advertisers are not very motivated to pay. In P2E, the economic model is endogenous; essentially, players are sharing the benefits of the growth of the game ecosystem. As the number of game players increases, the demand for in-game crypto assets grows, and players sell assets to each other, forming a nascent metaverse economy with farmers, merchants, and consumers. The key is that these players' interests are aligned, unlike the exploitative relationship between users and advertisers in Qutoutiao.
Why Do We Say Play-to-Earn is the Next Liquidity Mining?
The "DeFi summer" of 2020 ignited the DeFi industry, with the total locked value in DeFi growing over 100 times in a year. Currently, UNI, LINK, and AAVE have entered the top 30 in cryptocurrency market capitalization. The development of DeFi is absolutely inseparable from the creation of Liquidity Mining, which can be said to be the greatest contributor to the DeFi industry.
In the early days of Liquidity Mining, we heard many doubts because it resembled previous ICOs. Initially, users provided their ETH and stablecoins to earn platform tokens, which skeptics viewed as a new Ponzi scheme and bubble. However, a year later, the Liquidity Mining model has been proven by the market. The main reason for its success is that these DeFi protocols actually create value, and the earnings of liquidity providers are essentially a share of the protocol's growth revenue.
As mentioned earlier, the P2E model also allows players to share the growth revenue of the game ecosystem. As long as the game ecosystem continues to grow, this economic flywheel can keep turning. Even if there are phenomena like asset oversupply or price drops during the process, we believe that this model is fundamentally sound.
From the perspective of market participants, Liquidity Mining participants include "institutions-users-miners," while P2E participants include "guilds-players-wool party members." The entire economic cycle logic is consistent.
Optimistically, the P2E market is likely much larger than the Liquidity Mining market. In terms of revenue, on July 16, Axie Infinity's daily revenue was $8.8 million, while Honor of Kings' average daily revenue in June was $9.2 million.
Source: tokenterminal.com
In terms of user numbers, Axie Infinity's DAU has exceeded 500,000, while the top ten DEX protocols had a total of less than 300,000 users in 24 hours on July 17. Shockingly, Axie Infinity's DAU was less than 30,000 just three months ago. Additionally, the vast majority of Axie Infinity players were previously unfamiliar with blockchain technology and still do not understand it. Compared to DeFi, blockchain games have a very low entry barrier, especially after opening fiat deposit channels and using low-cost sidechains, making the gaming experience almost identical to traditional internet games. This is also why Axie Infinity's player growth has been so rapid. It is also foreseeable that blockchain games will break out even faster and attract a larger user base than DeFi, representing a market much larger than DeFi.
Source: debank.com
NFT Plays a Core Role
NFTs play a crucial role in the economic ecosystem of a game, influencing gameplay and revenue. They adopt different categories of rarity, ensuring a limited supply of certain rare NFTs rather than allowing for disorderly growth (hyperinflation) as the game progresses. The growth rate algorithm for NFTs was pioneered by Crypto Kitties and has matured further in Axie Infinity and Zed Run.
Games Generate Revenue from NFTs
Players can earn revenue through battles in Axie Infinity and racing in Zed Run, all generated through interactions with NFTs. These cash-flow-generating NFTs can be rented or loaned, as YGG does. Compared to art and collectible NFTs, games create use cases and utility for NFTs, enhancing their fundamental value (use value).
Source: outlier ventures
The use of NFTs is more importantly about truly property-izing virtual items. In centralized games, the ownership of items is actually controlled by the platform, while in blockchain games, due to the transparency and immutability of smart contracts, players hold ownership of crypto assets, and the assets bred from the assets they own also belong to them.
… The democratization of property is not achieved by abolishing property, but by popularizing property, so that every citizen can become an owner without exception. This is much easier than people imagine: in two words, learn to create wealth, learn to distribute wealth; you should combine the grandeur of material with the grandeur of morality.
------Victor Hugo, Les Misérables, 1862
Below, we will analyze Axie Infinity as an example of the first successful P2E blockchain game and its current performance.
Rising Entry Costs
The Axie Infinity marketplace is the primary channel for players to purchase Axies. The game mechanism is designed so that players can participate in the game and start earning by purchasing three Axies to form a team.
Current market prices fluctuate rapidly. Around July 8, the price of Axies was approximately $250 each, rising to about $350 on July 12, and reaching around $450 on July 14. Due to the sharp increase in player numbers and the impact of rising SLP prices, the payback period for Axies will quickly decrease, which in turn affects Axies' prices. Currently, the entry cost is about $1,300.
Source: Axie Infinity
Rising Breeding Costs
Observing the daily transaction volume of Axies, it began to surge around May 1 this year. This was due to the platform officially completing a technical upgrade around April 28, migrating the game from the ETH network to its self-developed sidechain, Ronin (with this change, players no longer need to pay extra gas fees while playing, and any earnings can be received instantly).
Total breeding cost = fixed cost (independent of the number of breedings, paid in ETH or AXS) + variable cost (dependent on the number of breedings, paid in SLP).
Since April, the fixed breeding cost has gone through three stages.
First stage: In April, Axie Infinity operated on the ETH network, requiring only gas fees without needing to pay AXS.
Calculating the breeding gas fee cost based on the ETH price and gas fees at the end of April, the breeding gas fee cost is:
2500 * 0.005 = $12.5
Second stage: After moving to the Ronin chain in early May, there were no gas fees, but 2 AXS needed to be paid:
10 * 2 = $20
Third stage: In early July, the breeding fee changed to 4 AXS, and the price of AXS increased:
20 * 4 = $80
From the player's perspective, the migration from the ETH main chain to the Ronin chain did not reduce the breeding costs; rather, as the price of AXS increased, it further pushed up breeding costs. However, as Axies' prices rise, the proportion of breeding costs is gradually shrinking.
In the game, the number of SLP paid varies depending on the number of breedings. Based on an SLP price of $0.3, the SLP cost for each breeding ranges from $30 to $510.
Source: Axie Infinity
Return Rates Remain Extremely High
In-game earnings come from three sources, with daily earnings from SLP (Small Love Potion) and selling bred Axies being the main income sources. Another source is earning AXS tokens (platform governance tokens) through monthly ranking competitions.
Daily tasks provide a fixed reward of 50 SLP, and assuming a 50% win rate in battles, players can earn 80 SLP daily. Additionally, players can earn up to 100 SLP daily through story mode. If players are familiar with their pets and skills, they can earn approximately 130-230 SLP (fluctuating) by playing the game for about 2-3 hours daily.
A seasonal system has been established, with a season lasting one month, and season rewards in AXS incentivizing players to invest more. The corresponding game reward is (1000 WAXS = 1 AXS):
Source: Axie Infinity
Each season issues a total of 9,350 AXS, equivalent to $187,000. Since only the top 300 players in the season can earn AXS, most players cannot obtain this income.
Source: Axie Infinity
Based on the trading behavior of Axies in the marketplace, most players breed Axies for sale, and due to the high breeding costs for Axies bred more than four times, the number of sales is relatively low. Therefore, we can infer that most players choose to breed no more than four times. Thus, we assume players breed once every five days and stop after three breedings. After that, they only earn SLP through battles and tasks, assuming a daily SLP earning of 150. We will calculate the player's return rate based on this.
Source: Delphi Digital, Axie Infinity
First breeding return: 450 - 100 * 0.3 - 4 * 20 = $340
Second breeding return: 450 - 200 * 0.3 - 4 * 20 = $310
Third breeding return: 450 - 300 * 0.3 - 4 * 20 = $280
SLP earnings over 15 days: 150 * 15 * 0.3 = $675
Total earnings over 15 days: $1,605, which exceeds the initial investment cost.
After 15 days, assuming no further breeding, earnings will only come from SLP.
Combining Axies sales and SLP income, we can derive the annualized return:
((340 + 310 + 280) + (365 - 15) * 150 * 0.3) / 1400 - 1) * 100% = 1091%
This return rate will fluctuate significantly with the prices of SLP and Axies. However, based on the current annualized return rate of 11 times, it is significantly attractive compared to mining with physical mining machines and DeFi liquidity mining. Therefore, we believe the Play to Earn model will attract some funds originally allocated for mining.
Treasury Economy (A Way to Protect AXS Prices)
4.25% of market transaction volume and all breeding fees will be allocated to the community treasury, which will be distributed among AXS holders.
Source: Axie World
Based on the current incremental speed of the community treasury, in the future, AXS holders will have the right to allocate a substantial amount of funds. Additionally, once Staking incentives take effect, more AXS will be stored, which will effectively support AXS prices. Even if DAU reaches a certain bottleneck in the future, leading to SLP oversupply, AXS will also have some buffer space.
Land Economy (Future Development Potential of the Game)
In addition to Axies, the game also features another type of land NFT, totaling 90,601. Similar to Axies, players can trade land directly in the Marketplace using ETH. Landowners can also earn rewards from their plots, such as AXS tokens. Additionally, in the future, players can build their homes on their owned plots using an SDK (map editor) and purchase materials for upgrades or decorations in the Marketplace. This is also a way for Axie Infinity to potentially become part of the metaverse.
Source: Axie Infinity
Are Axies in Oversupply?
The supply-demand relationship of Axies is highly correlated with the robustness of the entire game economic system. If Axies are overbred without new players purchasing them, it will lead to a drop in Axies prices, which in turn will affect the demand for SLP and AXS. Due to the infinite issuance property of SLP and the lack of corresponding deflation mechanisms aside from breeding, SLP will face severe inflation, ultimately causing a collapse in SLP prices.
Given the game design where each player can hold three Axies to play, it is reasonable to consider that the overall ratio of Axies to DAU should be between 4 and 5. Below, we will review data from the past two weeks.
Source: twitter.com/Maxbrand99
We calculate the future growth of Axies based on the average data from the past two weeks. On June 28, the number of Axies was 1.15 million, rising to 1.5 million by July 5, a growth rate of 30.4%. By July 12, it reached 1.96 million, with a growth rate of 30.6%. Taking 30.5% as the recent growth rate, the number of Axies on July 19 (one week later) is estimated to be about 2.55 million, and on July 26 (two weeks later), it is estimated to be about 3.338 million.
Source: twitter.com/Delphi_Digital
Based on DAU performance data, we can conclude that on June 28, DAU was 250,000, on July 5, DAU was 350,000, with a growth rate of 40%; on July 12, DAU was 500,000, with a growth rate of 42.8%. Taking 41% as the recent growth rate, the DAU on July 19 (one week later) is estimated to be about 705,000, and on July 26, it is estimated to be about 994,000.
Based on the above data, we can conclude:
If the recent growth rates of Axies and DAU continue, the ratio of Axies to DAU will continue to decrease over time, leading to further increases in Axies prices, creating a positive feedback loop with AXS and SLP prices, further elevating overall prices. From the current data, the supply-demand relationship of Axies still appears relatively healthy.
However, we believe that as the entry barriers gradually increase, the growth rate of DAU will be difficult to maintain at such a high level, and players will seek similar games with lower entry barriers. These factors will suppress the growth rate of DAU, while Axies breeding will maintain a certain inertia, continuing to grow exponentially, ultimately leading to oversupply. To maintain the robustness of the Axies economic system, the development team needs to continuously drive user growth, create new demand, and sustain the economic system's absorption capacity.
Competitive Analysis:
According to Buffett's moat theory, a company's moat mainly comes from four aspects: intangible assets (brand, patents, team), network effects, switching costs (the high cost of changing products after users have started using them), and cost advantages.
Brand: Axie Infinity is a phenomenon, and its backers, Animoca and guild YGG, have formed a certain brand among competitors.
Team: The playability of the game, the design of the economic model, and operational capabilities reflect the team's strong capabilities.
Network Effects: Axie Infinity already has 500,000 DAUs and maintains a very strong momentum due to guild support. The three-tier structure of "guild-manager-player" adopted by guilds has viral expansion potential, enhancing network effects.
Switching Costs: The switching costs for traditional online games are relatively low. Considering that Axies have certain nurturing attributes, players may develop emotional attachments to Axies, making switching incur some emotional costs. Guilds are a double-edged sword; they have strong social attributes, and the switching costs of social networks are the highest. If a guild overly relies on bringing in new players, it will face significant player attrition pressure when the guild itself migrates to another game. Axie Infinity can also increase players' switching costs through the expansion of its economic system.
Industry Concentration:
In traditional industries, we predict the concentration as follows: DEX > LEND > Games. The gaming industry will form a landscape where many projects coexist.
Conclusion: Can the Play-to-Earn Flywheel Keep Turning?
The P2E model has long survived in the traditional gaming industry, and blockchain games have endowed it with greater power. Taking Axie Infinity as an example, its currently high return rates attract many "wool party" players. If the return rates decline, it will lose this segment of players and reduce the attractiveness of Axies, AXS, and SLP to secondary market buyers. The rapid breeding speed and rising coin prices raise concerns about who ultimately supports the value of these virtual assets.
The answer is simple: it is the players consuming within the game who support it. In traditional games, it is often the top 5% of high-spending players who support the development and operational costs of the game. Even if short-term issues arise, such as game outages, reduced deposits, or excessive breeding leading to bubble bursts, these are merely short-term problems. If the game can attract enough spending players, it can sustain its long-term operation. We predict that as blockchain games develop, there will gradually be a trend of decreasing return rates and increasing playability, ultimately forming a healthy balance.
References
Understanding P2E 2.0: Axie Infinity Deep Dive | Outlier Ventures
P2E 2.0 -- A new economic model for gaming based on crypto tokens | Outlier Ventures
Original link: https://www.chainnews.com/articles/232772732457.htm
