Axie Infinity and the Sustainability of Blockchain Games

Introduction about Axie Infinity

Axie Infinity is a Pokémon-inspired game integrating blockchain technology, attracted millions of users, and generated more than $1.26 billion in revenue in 2021. The huge success of Axie Infinity makes it a classic case in the sector of GameFi, and its game mode and dual-token model are duplicated by many of its competitors.


The gameplay of Axie Infinity is quite simple, players need to own at least three Axies (the major NFT asset in the game) to join the game. There are two modes in the game, players can choose either battle with other players (PVP mode) or battle with the game AI (PVE mode), and winners can get SLP (utility token of Axie Infinity) rewards. In addition, top players with higher PVP rank on leaderboards can get AXS (governance token of Axie Infinity) at the end of each Season. Both SLP and AXS are economic incentives for people who play the game, and players can sell those token rewards in the market to support their lives. The breeding system is another interesting part in the game, players can spend some amount of AXS and SLP tokens to breed new Axies, and those Axies can also be traded in the market. According to Ronin Explorer, there are more than 11 million Axies, and most of them were bred by players instead of providing by the game itself.


Price Fluctuations of AXS and SLP

                                                            Source: Price of AXS/SLP, CoinMarketCap

In the first half of 2021, the price of AXS and SLP dramatically increased as thousands of new users entered the game and the market saw the potential of the game. However, in the latter half of 2021, the price of SLP experienced a continuous decrease resulting from the market crash and the decelerated growth rate of new users. As for AXS, the governance token of this game seems to be more stable than the utility token, but it also lost more than half of its value from the record price set in November.


There are many reasons behind the roller-coaster liked price fluctuations of AXS and SLP, such as the overall market conditions, the changing social awareness of the game, the game’s side chain release, and so on. In fact, all those reasons have an impact on users’ participation and their demand for in-game assets, thus affecting the price of those in-game assets, especially for the SLP token.


The Law of Supply and Demand behind Axie Infinity

The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. It plays an important role in most economic activities, including those in the crypto industry.


As mentioned above, Axie Infinity has a dual-token model and it releases two tokens, the governance token AXS and the utility token SLP, to operate the economic system. Even though both AXS and SLP can be used as rewards and breeding materials, the former one indicates the value of Axie Infinity itself, and the creation of SLP is only for strengthening the user experience. Therefore, users tend to hold AXS in the long run if they think highly of the project regardless of the real demand for the token. As a result, the price of SLP is more susceptible to external factors, and we will focus on this part in the following article.


Unlike AXS, the total supply of SLP is set to be unlimited. Axie Infinity’s protocol will mint a certain number of SLP tokens as long as users win the battles, and the only way of SLP burning is breeding new Axies. This preset mechanism makes Axie Infinity a weak toke economics. If the user base can grow sustainably, the balance of supply and demand for SLP can maintain at a satisfying level, otherwise, the token economics may be out of control. However, the user base growth and maintenance is a common difficulty faced by all games. Although Axie Infinity experienced an explosion in user growth last year, it was still hard for the project to maintain those users and keep attracting new users. As a result, the sluggish and even negative growth of the game's user base in the latter half of 2021 made the supply of SLP out of control.


At the beginning of 2021, some articles about 'some Filipinos earning money to support their lives by playing Axie Infinity' were widely spread in many communities. Along with the promotions from some gaming guilds like YGG and the stunning news about Axie Infinity’s revenue-generating ability, many new players got attracted and entered this game, increasing the demand for Axies (users need at least 3 Axies to join the game) in the first half of 2021. The price of Axies increased because of the increasing demand, and users were motivated to purchase SLP and breed more Axies, which also made the price of SLP skyrocket. Besides, it is worth mentioning that only the growth rate matters not the number of users playing the game based on Axie Infinity’s token mechanism.


                                                                         Source: SLP Issuance, Axie World


                                                                                   Source: Daily Active Users, DappRadar


According to the data from Axie World and DappRadar, the minting rate and the burning rate of SLP increased dramatically as the daily active users of Axie Infinity soared starting from May 2021. At first, as more and more users entered this game, the DAU of this project kept hitting its all-time high, and the increasing demand for new Axies made the supply (SLP minted) and demand (SLP burned) of SLP relatively balanced (no large difference between the two categories).


However, according to DappRadar, the DAU of this game started to drop after it reached around 61k in August, indicating a serious loss of existing users and a sharp decline in the growth rate of new players. Although there was a recovery in DAU after October, most of them are existing users re-attracted by Axie Infinity and have less demand for new Axies.


Decreasing demand for new Axies led to a reduction in its market price. On the official marketplace, the floor price for a common Axie is about $20 currently, which was about $120 five months ago. Generally, human activities are on behalf of benefits. When the profit of producing a new Axies can no longer bring motivation, most users are unwilling to generate new Axies, the price of SLP dropped as the demand for it decreased. According to the SLP Issuance chart above, since fewer users are motivated to produce new Axies, even though the project raised the amount of SLP required for each Axie, there is no obvious change in the burning rate of SLP.


On the one hand, users are less motivated to produce new Axis, leading to a ‘decrease’ in the burning rate of SLP. On the other hand, the large user scale of Axie Infinity keeps minting more and more SLP under the P2E mechanism. Except for some periods during May and July when the burning rate of SLP is larger than the minting rate, the minting rate is always larger than the burning rate, and the difference between the two broadens over time. From September to January, the minting rate of SLP was maintained at a rate of 4-5 times larger than the burning rate of SLP.


The crazy oversupply of SLP leads to a more serious token devaluation and can finally destroy the economic system.


Solutions from Axie Infinity

In the first half of 2021, when the success of Axie Infinity lit up the booming of blockchain games and the P2E concept, most people ignored its vulnerable economic systems and lack of entertainment at that time. But as time passed, the market started talking about its unsustainability because of the weak tokenomics and the dull gameplay. Several problems were exposed and identified by the market and the development team of Axie Infinity.


To solve these problems, the development team announced and implemented several updates to control the inflation rate within the game. For example, they raised the SLP required for each Axie production and reduced the SLP rewards from playing the game. Details are as follows.


* Players will have 20 Energy per day, the first 20 battles will cost 1 Energy per battle. Under PVP mode, players can only get SLP rewards when winning Energy-cost battles. Therefore, daily SLP rewards from PVP mode are random and unpredictable, and that’s why we did not list them above.



At the end of 2021, the minimum SLP rewards per day halved and the SLP costs for breeding increased by five times or so. In the latest update, the development team even removed all SLP rewards from Daily Quest and Adventure Mode, and players can only get token rewards from the PVP mode. In the latest update, the development team even removed all SLP rewards from Daily Quest and Adventure Mode, and players can only get token rewards from the PVP mode. The removal of SLP rewards from Daily Quest and Adventure Mode is more effective than just reducing it. In recent days, the minting rate of SLP dropped dramatically. However, it still cannot solve the fundamental issue, and the price of SLP kept falling as the circulating supply of SLP rose continually.


Moreover, new problems occurred because of the rapid drop in rewards from playing. As a game, Axie Infinity cannot bring much entertainment, and most users play the game not for fun but for the rewards they can get. If the rewards cannot be equivalent to the time and efforts they pay for playing the game, a dramatic drop in the user base is expected. The daily active users of Axie Infinity did drop from 50k to 22k in February in response to the removal of SLP rewards for Daily Quest and Adventure Mode. In addition, Axies with high combat effectiveness are generally controlled by these large guilds like YGG. If users can only get rewards through PVP mode, the rewards they can get depend on how competitive their Axies are, as a result, a few top players and large guilds may monopolize the SLP market.  Such a monopoly can crowd out normal players and harm the game's long-term sustainability.


                                                      Source: SLP Circulating Supply and Price Chart, Messari 


When the simple adjustment of supply and demand cut no ice, the development team took more actions to deal with this situation. To motivate users to hold SLP in the long term, Axie Infinity launched its decentralized exchange called Katana, on which users can stake SLP/WETH, for more rewards.


                                                                                         Source: Katana


To maintain the price of Axies so that users would be motivated to breed more and burn more SLP, Axie Infinity launched the Lunar New Year event, in which users can release their Axies into the wild (burn the ERC-721 token and reduce the existing number of Axies) and get limited edition land item in return. 49,513 users participated in this event and released 147,443 Axies into the wild. Compared to the number of Axies in the market, which is around 11 million, the number of Axies released in this event is unworthy of mention, but it was a good try and added variety and entertainment to this game.


                                                                      Source: The Lunacian Express, Axie Infinity

As for the gameplay, the team also tried to add more fun to this game, such as more utility of the land and a more attractive battle mechanism.


Sustainability of Blockchain Games

As mentioned above, the market started questioning Axie Infinity's sustainability because of its weak economic system and dull gameplay. The same problems occurred in other blockchain games. 2021 is The Year of Gamefi, and many blockchain games were released urgently without well design to catch the hot topic. Most of these projects had an extremely short business cycle. One day they came to the market, the other day they were out.


Blockchain game is electronic games integrating with blockchain technology. Currently, gameplay part and P2E mechanisms are the two core factors for blockchain games. If a blockchain game does not pay attention to the entertainment it can bring, and is elaborate with the economic system, the possibility for it to survive in the market will be very low.


Furthermore, like Axie Infinity, it will be hard for a blockchain game to change its gameplay and tokenomics after the release, and here is why. Firstly, when a project accumulates a large user base, it is not easy for existing users to accept new updates, especially when the updates are related to tokenomics that damage the interest of some users. Secondly, the tendency for blockchain games is going decentralize. If the team can change the terms of the project without users' permission after launch, it violates the tendency of decentralization. Many blockchain games indeed try to adopt DAO to promote their future development decentralized, however, many cases proved that DAO is an inefficient way to decide something at the current point.

In summary, Gamefi is the sum of game and finance. Gameplay and economic system are both critical for blockchain games, and it is better to perfectly design the two core parts at the beginning of game development. With some famous game studios' joining the crypto industry, the gameplay part of blockchain games is believed to be greatly improved. As for tokenomics, the long-term balance of the supply and demand for in-game assets matters. If the game cannot create enough utility for the reward token, the P2E model has no sense.