Axie Infinity: It’s (still) just the beginning
Since we first wrote our first detailed piece about Axie Infinity around the end of July, its value has more than tripled. It comes as little surprise then that many who have missed out on its ostensibly meteoric run have decided that they have missed the party. After all, surely something that has TRIPLED in 4 months is severely overbought.
Part of the spotlight has therefore shifted to the “next Axie”: everything from the most illustrious launches in the cryptosphere like Illuvium and Star Atlas, to ambitious upstarts that seek to address the apparent shortcomings of Axie as a game by promising better graphics, better gameplay, better token economics, better everything for less.
It almost feels like a replay of the previous chapters of “Bitcoin killers” and “Ethereum Killers” from years past. History doesn’t necessarily repeat, but so far, it’s rhyming pretty closely.
To us, though, we’re of the view that this is just the beginning for Axie, that the “next” Axie Infinity is Axie Infinity.
As always, important disclaimers and disclosures: this is another one of pieces in which we articulate our views on a project we find extremely interesting – almost era-defining.
This note, as always, is NOT financial advice, nor a solicitation to purchase any instruments, so PLEASE consult your friendly financial advisor if you require advice.
Finally, further disclosure: we hold a position in AXS.
With that out of the way, let’s talk about the “next” Axie Infinity: Axie Infinity.
Fooled by price action
The first confounder in this entire saga is the fact that Axie Infinity’s AXS token has a publicly available price. AXS was first listed on Binance at around 11c in Nov 2020, and for anyone who had the clarity of foresight (or luck) to own some AXS back then, the total return clocks in at a whopping 1318x in the past year.
The problem with having a chart is that charts are associated mainly with stocks: publicly listed equity of companies that have traditionally had years of operating history, certainly sufficient to satisfy the requirements of exchanges and regulators. By construction, therefore, these are traditionally matured businesses, for which a return of 1318x in a year would be absolutely ludicrous. Sound the alarms, the price has outrun the fundamental valuation!
The reality, however, is that Axie Infinity is still in its infancy, and the studio behind it, Sky Mavis, is very much an early-stage business. Remember when we wrote that crypto is simply early stage investing with huge liquidity and a constantly quoted live market price? This is that exact situation in play. Looking at the trailing price performance of AXS and comparing it with the price action of traditional listed instruments is a very dangerous fallacy.
Take it from the experts in early stage investing, none other than A16Z, whose very recent investment of US$152m into Axie’s game studio Sky Mavis unambiguously puts this in the realm of “early stage”: is A16Z coming in for a 30% return? That would be highly unlikely.
The contrast with the way we look at traditional investments doesn’t stop at just an illusion of maturity conferred by the presence of a listed trading price.
One of the biggest structural advantages that crypto businesses have over traditional businesses is the ability to traverse geographical boundaries effortlessly and have an addressable market that is instantaneously global, the same way “internet” businesses bulldozed their brick-and-mortar predecessors, creating addressable markets that were WAY larger than what the previous generation would consider addressable in the first place.
Blockchain gaming brought to the fore a brand-new set of gaming economics – not just for the players but also for the game developers. As we noted in our first piece on the topic, the Play-to-earn mechanic successfully pioneered by Axie Infinity fundamentally usurped the stack of reasons why people play games, as well as the expectations of players and developers from each game that is delivered. People get involved with the game for a MUCH broader set of reasons than just “for fun” – it becomes a way to make a living that never existed before. Conversely, the economics of game design also change for the developer: the game needs to be monetised in a very different way, addressed to a much bigger audience and made economical for a much wider range of income levels.
All of these new dynamics come together to offer games like Axie Infinity an addressable market that is WAY bigger than a traditional AAA game. For anyone who’s looked at the game, or tried to play, it’s clear that this isn’t Call of Duty or World of Warcraft. The gameplay is much simpler; a snob might call it “boring”. But this is a source of income for otherwise unskilled, unemployed individuals especially in the emerging world. It’s a job. Think of it like that and perspective changes.
And that’s why the addressable market of players for Axie Infinity, despite its “simple” gameplay dynamics, is unlike any other game. It’s not the number of people “who would enjoy playing this”, segmented by “casual vs hardcore” gamers as a traditional video game analysis would entail. The question is: “How many people would find the income from playing this game appealing?”
Well, with earnings clocking in at around US$100/week, that annualises to 10x the average annual income of the bottom 50% of incomes globally (source: World Inequality Report 2018). Notwithstanding the skew in global income distribution, that’s a lot of people for whom playing games might constitute a significant pay rise. Addressable market of potential applicants? Billions.
We’ve already seen this dynamic playing out: when we first started looking at Axie Infinity in earnest, they had just crossed the milestone of 1m Axies bred with just under 300k daily active players. Those numbers are now almost 9m Axies bred, with north of 2m daily active players. Huge growth? Yes. Saturated market? Far from it.
Sky Mavis and the team behind Axie are just getting started, and they are well-equipped for their journey: not only do they have a top-notch team and US$152m of investment from A16Z, they also have their entire treasury of earned AXS and ETH. Yes, revenue! At current market prices, c. 20m AXS and c. 45k ETH adds up to just over US$3.1bn of available resources for all their development needs.
If we were to bet where the next Axie Infinity will come from, it’d be from Axie Infinity.
Transformative, and not just for itself
As we mentioned earlier (in the disclaimers, in case you skipped over it), we think Axie Infinity is an era-defining platform. Many will come after it claiming to be better in one way or another, and that may well turn out to be true. But what Axie Infinity is shaping up to be is a transformative force, not just for the gaming industry, but for the world of crypto and the world in general.
We’ve seen what access to a captive base of users allows ecosystem owners to do: Facebook and Google are the greatest examples of first amassing users and then finding ways to monetise. Just as the “old world” was the antithesis of the “online world” characterised by the previous generation of Internet giants, Facebook and Google inclusive, the captive ecosystems of the likes of Facebook and Google are now, in turn, the antithesis of what decentralised games like Axie Infinity stand for.
In Axie’s case, north of 2m people (and growing every day) are effectively working in a metaverse that is very real for them. The fact that they make real money that goes towards putting food on the table, building homes and educating children confers as much validity on every single second spent in the world of Axie Infinity as time spent at work in a “normal” job.
From this reality, especially those in the developing world, players are experiencing first-hand the benefits long promised by crypto but which the developed world brushed off as insignificant: having a bank account, being able to save (through staking), being able to buy and sell on an online marketplace and bank the proceeds, being able to spend those proceeds on very tangible “real world” goods and services. In short, having a financial identity where previously they were deemed insignificant and too much hassle to be worth the effort to onboard to a bank.
Put differently, every player of Axie Infinity, as part of their journey to starting to play, earn and cash out, has gained more knowledge and experience of the world of crypto than the majority of the rest of the world – certainly more than those who continue to deny the validity of decentralised crypto-powered systems.
With the launch of Katana, the native decentralised exchange on Axie’s dedicated side chain Ronin, players have more and more reason to become increasingly engaged in the Axie Infinity metaverse.
As far as crypto literacy goes, the developing world is in the process of leapfrogging much of the developed world. The very fact that most Axie Infinity players appreciated the critical importance of a native DEX on the Ronin side chain and how that could herald in integrations with existing DeFi protocols, roping in growing numbers of new users by circumventing the high cost of transactions on Ethereum’s base chain, already speaks of a high level of understand of how the decentralised web works.
The checklist of learning points is long and growing:
As more and more people turn to the metaverse as a source of employment and income, spending more and more time interacting with the environment, the tangibility of the ecosystem continues to grow. We flagged this up in one of our newsletters before, but in case you missed it, Axie Infinity is now being used to elect local officials in the Philippines:
Add in scope for advertising, companies that do business within the world of Axie Infinity, even greater political involvement, and increased penetration of financial products and services, and it is clear that we are a long way from Axie Infinity being a completed project.
The openness of the decentralised web that Axie Infinity is built on ultimately permits movement both ways: users can seamlessly move off into Ethereum’s main chain and transact with the big boys, or the goliaths of DeFi could launch on Ronin. Whatever happens is a win for adoption, catalysed by the success of Axie Infinity in demonstrating the possibilities of a decentralised world.
Many fish in the sea, but none compares with Axie
The sceptic would at this point still argue that yes, sure, Axie is the trailblazer, opening the gates to what was previously deemed impossible. Great, but the game is BORING. Surely there are other games out there that, building on the same play-to-earn dynamic that Axie pioneered but imbued with the power of AAA graphics and much more engaging plotlines, will ultimately eclipse Axie Infinity. After all, there can be more than one winner in this space – it’s not like there’s only ever ONE computer game that everyone in the world plays.
To that suggestion we would say, yes, of course – there are other exciting new games out there which may well compete hard with Axie Infinity in the future. But given the early stage nature of the entire blockchain gaming space, Axie Infinity is not only the clear leader, it is also the best equipped to dominate: in terms of its economic model, the size of its treasury and resources and the size of its user base. And of course the sheer quality of the team that Sky Mavis is assembling is something else. The best talent goes to where the action and opportunity is. And right now its right here.
Not to forget either that Axie Infinity as a game is still in its Alpha phase: it may be an open alpha which the public can participate in, but traditionally, Alpha versions are released as an “Early access” release to a small, select group of gamers (e.g. internal testers, loyal fans etc) who would stress-test the very limited gameplay in a largely controlled environment, reporting bugs to the developers because even the biggest game studios produce games with bugs that need to be patched subsequently, regardless of how many rounds of checks are done.
Let’s be clear, therefore: what we see with Axie Infinity right now is the tip of the iceberg of what the game can grow into. The fact that there are many players once again belies this fact because in the “traditional” world, only a game in its final release could have 2m+ daily active users. Which developer would have the gall to release an incomplete game release into the wild reality of the real world?
But this is crypto: openness and community input are at the heart of the crypto ethos. And that openness and engagement, along with the economic design of the game, is exactly why notwithstanding high gas fees (in the beginning), server overloads, extended delays for Land Gameplay (yes, did you forget that was coming?) and other bugs that would normally have crippled greater gaming studios than Sky Mavis (think CD Projekt and Cyberpunk 2077) have been so well-tolerated by the gamer community.
Being able to make a living from Axie offsets shortfalls in gameplay, and the development team’s ability to respond promptly to the needs of its gamer community continues to build goodwill – even when making hard decisions like raising thresholds for minimum skill levels needed to earn. But the optionality in what Axie Infinity can grow into is what fascinates us.
Axie Infinity has achieved what other projects can only dream of: critical mass of users. That is what differentiates it from new and upcoming projects which promise greatness.
And we all know how the story pans out once critical mass is achieved: barring a serious faux pas, this very quickly becomes a black hole, sucking more and more mass into its core.
And that’s good.
The Axie Infinity wish list
To wrap things up, letting our imagination run completely wild, here’s our wish list for what Axie Infinity may ultimately bring about. When? Who knows, but maybe soonTM?
Ronin as Ethereum’s largest side chain: the Ronin bridge contract is already the largest bridge contract facing Ethereum L1, with US$8.2bn of assets locked in the bridge and carried over to Ronin (source: https://dune.xyz/eliasimos/Bridge-Away-(from-Ethereum)), not to mention the total value that is created within the Axie ecosystem. Can Ronin be bigger than Ethereum? Not impossible – this is truly Crypto for normies.
Katana as the world’s largest DEX: Regardless of whether Ronin makes it to the #1 spot, the staggering success of Katana is something to behold. Launched on the 2nd of November, Katana promptly went from zero to US$1.2bn of liquidity, provided by users staking ETH and AXS/SLP into staking pools (our note on AMMs here), within 4 days. To put things in context, in 4 days, Katana was able to provide 25% of the liquidity currently present on Uniswap v3, and Uniswap is THE pioneer of AMM-driven DEXes. Ronin currently exists as a walled garden, but as a side chain it is architecturally identical to something like Arbitrum. Could we see more tokens being bridged in and traded on Ronin? Not impossible. And if they do, could they trade on Katana? Why not.
NFT loans: Outside of the world of Axie Infinity, NFTs are mostly art pieces, fodder for the “Right click and save guy”. But in the world of Axie, they are beyond question a productive asset: like a car, a tractor or a plane. They are THE principal means by which players earn their living. Can they be borrowed against? Again, no reason why not. NFT loans backed by Axies as collateral could well become a reality.
Microlending and financing: More broadly than collateralised loans is the possibility for uncollateralised loans against expected income. The world of decentralised finance is, it may surprise many to learn, a VERY conservative one. Loans are made against collateral which is actually liquid, and which has a ticking market price, and they are almost always AT LEAST 200% collateralised. Lending against future income is difficult when all you know about a counterparty is its Ethereum wallet address, but less so when that wallet address is tied to a history to gameplay and income generation. Could we see the first crypto-based income loans come to fruition for Axie Infinity players? It would be fantastic news for players in the developing world to access funding in this way, especially when they have little by way of collateral to offer up in the first place.
New business models: We’ve already seen guilds like YGG emerge as entities that help to organise players into a structure in which they can play, receive training and support, and ultimately earn a living. Around these players, an ecosystem of trainers, managers and service providers have started to grow – and they will continue to grow as long as the ecosystem remains intact and beyond critical mass.
These are just some guesses about where Axie can go, and reality might turn out to be very different from what we are even able to imagine now. But they all point to a general direction: Axie is bringing crypto mainstream and to the masses, starting with the local communities far from the financial centres of the world.
Of course, we can still try and look for the next big thing (and we will). But not at the expense of neglecting the one we've already found.
Because even now we don’t think we’re remotely late. It’s not even the end of the beginning.