Business: Play Axie Infinity and win cryptos?!

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This is a fun, but unfortunately failing idea.

Axie Infinity, the “play-to-earn” blockchain video game where people can earn cryptocurrencies by controlling “cartoonish blobs distinguished by their unique mixture of interchangeable body parts” that fight each other and are also non-fungible tokens. The idea is that you pay a bunch of money to buy your starter set of NFT cartoon blobs, and then you play and breed (!?) the cartoon blobs to earn more tokens, and ultimately you get a return on your investment in the form of cryptocurrencies that of course (1) lose most of their value when people realize that this is a Ponzi scheme and (2) also get stolen from you because that is just how crypto works.

Anyway those things happened. The advantage of running your Ponzi scheme as a play-to-earn game rather than a straightforward investment opportunity is that, when the scheme collapses, you can pivot from “play-to-earn” to “no no no no no, this is just a game, nobody should be in it for the money, what are you talking about?” And so Sky Mavis Inc., the company that created Axie Infinity and got robbed of $620 million, is pivoting:

As Sky Mavis’s revolutionary rhetoric began to look increasingly hollow, the company shifted its story. In December it quietly altered its mission statement, deleting the phrase “play-to-earn” and replacing it with the mushier “play-and-earn.” Days after the hack it launched Axie: Origin, a long-awaited new version with upgraded graphics and tweaks to the gameplay. Crucially, this iteration doesn’t involve cryptocurrencies at all, because Sky Mavis has acknowledged that many players are willing to engage with a new game only if the complications of crypto are removed. The plan is for Origin to supplant the original game, with the noncrypto version attracting a broad base of players. Of course, Sky Mavis would still also offer a full version with the original crypto economy.

Company executives are trying to give the impression that nothing is wrong, but a clear sense of tension has edged in since Axie token values began to plummet late last year. When I first spoke to Sky Mavis co-founder Jeffrey Zirlin in late January, he told me he was living somewhere in the US but paused when I asked where in the country he was. “I could live anywhere, I don’t usually leave my room,” he said. He did finally give me a more specific location, but asked me not to make it public, noting that his team has gotten death threats. “We have to be careful revealing our location, just like the president doesn’t always have to reveal his location,” he said. “We’re kind of like heads of state.”

Zirlin said he empathized with people who’d lost money—life-changing sums, in some instances. But he added that a crash that got rid of Axie profiteers could have its upside, too. “Sometimes having to flush out the people who are just in it for the money,” he said, “that’s just the system self-correcting.”

Axie token

See imagine if Bernie Madoff had said that. “When my clients lose all their money, that’s just the system self-correcting.” Honestly not wrong! 

Look, I think the economics of play-to-earn video games are self-evidently bad. If you are earning money, it has to come from somewhere, and what is Axie Infinity selling other than the gameplay itself? If 10% of players earn money by making the game more fun and exciting for the other 90% of players, who pay for a good experience, that’s fine, and there is a long history of multiplayer games with economics like that, where most people play for fun but some people have the paid job of making the game more fun for everyone else. But if the game is advertised as a “play-to-earn” experience, as a route out of poverty, etc., then everyone is playing to make money from each other, which is only sustainable by constantly adding more new players, and it is a pure Ponzi

But I also think that this is a standard, deep move in web3 economics. Traditional web platforms have “network effects” where a thing is more valuable the more people use it; this creates incentives to join the big platforms. But web3 platforms have “token effects” where early adopters get a lot of tokens that represent a sort of equity in the platform; this creates incentives to join platforms early. So web3 projects tend to have two related components:

  1. A decentralized distributed system that (you hope) does something useful, and
  2. A token that enables you to use the system and that goes up in value when the system becomes more popular.

The attraction of any web3 project, early on, will be a combination of those two things: You get to use a thing that you think is good, and also the early adopters will get rich if it takes off. In a frenzied crypto boom, the Ponzi element — the prospect of getting rich if the thing takes off — will tend to dominate, and most people will be in most projects for the money, not for the utility of the underlying thing. But eventually that has to flip; Ponzis can’t work forever. If your project gets established enough, if it offers real utility, if people are buying tokens to do the thing that it does rather than to speculate on the tokens going up, then you can transition from Ponzi economics to just regular old economics. People will buy the token because they can use it to do useful stuff, not because they hope more people will pile in and they can sell it for a profit.

This flip will probably happen gradually over time, but it might be crystallized in a broad market crash, and then you might go around saying things like “sometimes having to flush out people who are just in it for the money, that’s just the system self-correcting,” and that will make sense. I am not sure it does here.