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Hey Everyone 👋 ,
The Index Creator Summit is tomorrow (Thursday) starting at 9:00am PDT. We’ll have the founders and CEOs of Figma, Discord, Patreon, OpenSea, Rec Room, Gather, and many more. The Summit is open to everyone to watch, and you can register here.
With that, on to this week’s piece on digital economies 💰👇
The Deceptive Complexity of Axie Infinity's Digital Economy
Moments of crisis lead to unexpected innovation. The Great Chicago Fire of 1871 led to the invention of the skyscraper in Chicago; the world’s cities would never look the same. World War II gave us radar and the atomic bomb, but also penicillin and the first flu vaccine. And now, Covid-19 is accelerating innovation again: mRNA vaccines, telehealth, online learning. But the pandemic’s most revolutionary contribution might be a fundamental rethinking of how we work.
Derek Thompson makes this argument in a great piece in The Atlantic last week. Economists are calling this moment “The Great Resignation”, and Thompson points out that “quits”—as the Bureau of Labor Statistics calls them—are at an all-time high. In August alone, 7% of hotel and food service employees quit—that’s 1 in 14 workers, just in a single month. According to Business Insider, a whopping 73% of all Americans are thinking about quitting their job.
People are revisiting long-held beliefs about work: “Do I need to work a 9-to-5?” “Does it really make sense to commute an hour every day?” “Do I need to spend this amount of time away from my family?” Workers are rejecting the soullessness and mundanity of America’s Office Space-style work culture.
Instead, workers are choosing to work in the digital economy. As Ben Thompson put it, it’s not work-from-home; it’s work-from-internet. And it turns out, working in the digital economy can be more enjoyable, more flexible, and more lucrative.
In February 2020, a Venezuelan woman wrote a Medium post about how she could earn more playing Axie Infinity for just a few days than she could earn working her previous job for a full month. This was especially important given Venezuela’s hyperinflation. As she wrote (excuse my rough translation from Spanish):
In Venezuela, there is a hyperinflation crisis that has literally destroyed our fiat currency. For this reason, earning in foreign currency became a necessity. But since Venezuela is blocked from many traditional payment systems, such as PayPal, my options were limited. I thought the best idea would be to get paid in cryptocurrency.
Back in the spring, I wrote about how workers in the Philippines were earning a living playing Axie Infinity, a crypto game in which you breed creatures called Axies and send them into battle against one another.
When I wrote that piece, Axie was doing $100K per day in revenue and had 38,000 daily active users. Six weeks later, Axie was doing $18 million per day in revenue, a 180x increase. Today, Axie has 1.85 million daily active users, up 4,768% since spring.
In August, Axie did $364 million in revenue. Revenue has declined since then, but it still topped $200 million in September and has grossed $125 million halfway into October:
Axie is on track to surpass $1 billion in revenue this year:
This week, I want to dive deeper into the economics of Axie. This is important because 1) Axie is probably the most important on-ramp to crypto in the world right now, and 2) because as more workers find work in the metaverse, we often overlook how complex these economies are. Digital economies may be disguised within games—in Axie’s case, within a colorful world of cute, quirky creatures—but they’re deceptively intricate. We can learn a lot from these early digital economies about the future of internet-native work in the post-Covid era.
The Economics of Axie
So, how does Axie actually work?
Axie’s economy has two tokens—two in-game currencies that underpin the Axie economy. The first is Axie Infinity Shards, or AXS, which is Axie’s governance token. In some ways, you can think of AXS like voter registration rights, equipping you to be a “citizen” of the Axie Infinity world.
The second token is Small Love Potion, or SLP, which is the currency that fuels Axie’s economy. SLP is earned by playing the game—for example, by winning battles with your Axie—and SLP is spent through the breeding of Axies. SLP is an uncapped utility token, which is a fancy way of saying that supply ebbs and flows. SLP supply typically hovers around 500 million, but will be higher if more SLP is being earned than burned, and vice versa.
You need three Axies—three creatures—to play the game. You spend money to buy your Axies (or Yield Guild lends you Axies so you can start playing, since each Axie currently costs ~$200), and then you play either Adventure Mode or Arena Mode. If you win, you’re awarded SLP. Using Uniswap or Binance, you can convert your SLP into ETH and then into dollars. That’s how you make real-world money playing the game.
Axie’s inflection point came on April 28th, when the game switched from the Ethereum blockchain to the Ronin sidechain. Before the switch, players had to pay high transaction fees on Ethereum, which limited who could afford to play. Ronin eliminated those fees. Along with switching to Ronin, Axie integrated Ramp.Network, a fiat-to-crypto platform—in other words, now people could buy ETH using their credit card. This opened the floodgates to people who could buy Axies on the marketplace and start playing the game.
Growth exploded. Daily active users surged from 38,000 in April to 250,000 in June to nearly 2,000,000 today. Members of Axie’s Discord server have grown from 50K in April to 800K today. Revenue leapt from ~$10M in June to ~$200M in July.
You can see in the charts above that Axie captures revenue from both marketplace fees and breeding fees. Before switching to Ronin, most revenue came from marketplace fees (Axie takes a 4.25% cut from the seller). Now, with no ETH transaction fees, the lion’s share of revenue comes from breeding fees. In August, Axie captured $37 million in marketplace fees and $328 million in breeding fees.
There are real economic risks within Axie. Overbreeding of Axies, particularly from power players who hold many Axies, could dilute the value of Axies and create a glut of supply—this could in turn lead to less value-earning potential for new players, slowing player demand. The economy could freefall. To keep the economy in check, Axie can change the breeding cost—for example, from 2 AXS to 4 AXS—similar to how the Federal Reserve controls interest rates in the real world.
Axie’s economy is far more detailed than this quick overview lets on, but hopefully that communicates the basics. On the surface, Axie seems like a fun game full of cartoonish creatures. But underneath, it’s a vibrant and robust world that is reimagining how we interact and earn online.
Emergent Digital Economies
Axie is a pioneer in play-to-earn gaming. But I like to say that Axie is heavy on the “earn” and light on the “play”. The game just isn’t very…fun.
This is mostly fine, as for thousands of players (roughly 40% concentrated in the Philippines) Axie is used as a source of income: it’s a replacement for work, and work isn’t typically too fun either. But play-to-earn gaming has the potential to be both economically rewarding and entertaining.
There are emerging games and digital economies that have promise. One of the most interesting blockchain games under development is Star Atlas.
Star Atlas is an MMO—massively-multiplayer online game—set in the year 2620. The universe has been colonized and balkanized, and players must embark on space missions, a la Star Wars or Star Trek. Importantly, Star Atlas is a AAA (“Triple-A”) game. AAA games are like the blockbusters of gaming—high-budget, beautiful, polished. It’s a big deal that a AAA game is being built on blockchain.
What’s fascinating about Star Atlas is the complexity of its economy. The makers published a white paper outlining the economy that runs 38 pages long (!). It’s pretty detailed, but I’ll outline the basics.
Similar to Axie, Star Atlas has two tokens. They’re called POLIS and ATLAS and both are fungible—in other words, every POLIS is equal to every other POLIS, and every ATLAS is equal to every other ATLAS. To give my go-to example of fungibility:
POLIS is the governance token—holding POLIS lets you vote on economic decisions within Star Atlas. POLIS has a fixed supply set to 360,000,000 (supply will only grow if enough tokenholders vote to expand it) and it’s divvied up based on active participation and performance in the game.
ATLAS is the payment token and ebbs and flows with the economy. It’s Star Atlas’ currency: you earn ATLAS, for instance, by completing a mission in the game. ATLAS is inflationary, meaning it should grow as the economy grows.
As a rough analogy, POLIS is to AXS and ATLAS is to SLP.
ATLAS and POLIS are effectively the money in the economy. But they’re only the first of four key pillars to the economy. The other three are land, items, and resources. All of them live on-chain.
What’s stunning is how much thought the makers of Star Atlas put into the nuances of the economy. All land is owned rather than rented. This is to “protect users from eviction or discrimination by rent application.” (It would be nice if it were that easy in the real world!) And, of course, land owners have to pay taxes. If a land owner doesn’t pay taxes, the land will be foreclosed and then auctioned by local governance, recapturing back taxes and a fine. 🤯
The Star Atlas economy mirrors the richness of our real-world economy: land has value; tokenized goods are provably scarce; there is real monetary policy and the community acts as the de facto Federal Reserve. It’s one of the most ambitious projects in play-to-earn gaming.
One new entrant, announced last week, is Crypto Unicorns from Laguna Games (white paper here). Each unicorn in Crypto Unicorns has certain skills—some are good at racing, some are good at jousting, some are good at battling 🦄 The game features its own token economy: Rainbow token (RBW) is a governance token used for community governance, and Unicorn Milk (UNIM) is the token earned through game-play.
The founder of Laguna Games, Aron Beierschmitt, calls Crypto Unicorns a new category of gaming: rather than play-to-earn, it’s play-and-earn. In his words:
The blockchain gaming industry is experiencing explosive growth, and we are convinced that we are on the verge of the next platform wave. As long-time free-to-play game developers, we are excited to move away from the extractive nature of F2P into fostering and nurturing community-owned game economies through a movement we’ve coined as Play-and-Earn (PAE).
The next wave of gaming—and, more broadly, the next wave of digital economies—is community-owned. These digital economies are deceptively complex, disguising their richness within their colorful game interfaces. And they signal a future of digitally-native work—work that is a far cry from the corporate stasis of the last 50 years, and work that is both enjoyable and economically rewarding.
Last week, The Guardian ran a piece on “time millionaires”—people who measure their wealth not in money, but in time. Many time millionaires adopted this new worldview during the pandemic. Samuel Binstead, for instance, is “a recovering workaholic” who ran a wine bar before Covid. He worked 10am to 1am most days. His own mother didn’t invite him to her 50th birthday, because she knew he’d be busy. “She was probably right,” he admits. “I wouldn’t have been able to get time off.”
Last year, Binstead sold his wine bar. He now sells coffee in the morning and closes for the day at lunchtime. In the afternoons, he sees friends or practices photography. He estimates he’s “100 times happier” than he was before.
People didn’t always build their lives and identities around work. Before the Industrial Age, the wealthy elite received status by not working, living off land rents and investments. But industrialization brought an upwardly mobile middle class, and industry replaced leisure as a marker of respectability. This is now changing. As The Guardian puts it: “The calls to end the fetishization of overwork, and its concomitant self-optimization culture, are gaining traction.” This may be the pandemic’s lasting legacy.
People are quitting and embracing new approaches to life. As Thompson writes:
Quitting is a concept typically associated with losers and loafers. But [today’s] level of quitting is really an expression of optimism that says, We can do better. You may have heard the story that in the golden age of American labor, 20th-century workers stayed in one job for 40 years and retired with a gold watch. But that’s a total myth. The truth is people in the 1960s and ’70s quit their jobs more often than they have in the past 20 years, and the economy was better off for it. Since the 1980s, Americans have quit less, and many have clung to crappy jobs for fear that the safety net wouldn’t support them while they looked for a new one. But Americans seem to be done with sticking it out. And they’re being rewarded for their lack of patience: Wages for low-income workers are rising at their fastest rate since the Great Recession. The Great Resignation is, literally, great.
Of course, not everyone has the financial foundation to become a “time millionaire” or to start earning their living in the metaverse. Digital economies are nascent and not yet robust enough to support billions of digital workers. These same trends are powering the creator economy, remote work, freelancing; they are broader than Axie and its counterparts. But immersive, complex worlds like Axie and Star Atlas are showing just how nuanced online economies can be. They’re rethinking the meaning of work and opening the aperture to global, borderless, internet-native economic opportunity.
Sources & Additional Reading
Time Millionaires | Sirin Kale, The Guardian
The Great Resignation Is Accelerating | Derek Thompson, The Atlantic
The best data sources to understand Axie and P2E gaming more broadly are: Delphi Digital, Sky Mavis, AxieWorld, and DappRadar
Special thanks to Piers Kicks for being my original guide as I waded into Axie-land and P2E
Packy at Not Boring has a great deep-dive into Solana, which Star Atlas is built on, if you’re interesting in learning more
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