Play-to-earn games could take crypto mainstream

People are paying in the real world with Axie Infinity's gaming tokens. That could turn a fun feature into an onramp to cryptocurrency for financial services.

 An Axie Infinity game screenshot

Axie Infinity could introduce consumers to the idea of spending with cryptocurrency.

Screenshot: Sky Mavis

Axie Infinity has become a hot new gaming company, but not for its mind-bending gameplay or dazzling artwork.

It's the underlying cryptocurrency system and the economic opportunities that have emerged on its blockchain that have drawn users globally.

Think of Sky Mavis, the Vietnam-based company behind Axie Infinity, as a financial services firm with a game front end. It built its own sidechain to Ethereum called Ronin, a crypto wallet and a marketplace for buying and selling Axie characters as NFTs.

The game has exploded in popularity, with nearly 2 million daily active players. One character has sold for $819,660 and the game's crypto system has $5.5 billion in virtual assets locked up in smart contracts, according to DappRadar.

Sales peaked in August at close to $850 million, dipping to $550 million in October. However, monthly unique buyers peaked in October at close to 400,000, according to CryptoSlam. The total value of one of its tokens, AXS, is $38 billion.

This success comes despite the hurdles it takes to play the game, which include getting a crypto wallet, buying ether and then spending more than $1,000 worth of ether to buy the AXS tokens that are required to play.

On the surface, Axie is a Pokémon-style game where you use Axies with various powers to battle against other players. But in the play-to-earn model, players earn tokens by winning a battle with their Axies against other players, or by selling them on Axie's marketplace. These tokens can then be sold for fiat money — real cash. But to get an Axie, players have to buy one on the exchange or breed them from existing Axies.

Axies are themselves NFTs, or non-fungible tokens — unique digital items verifiable on the blockchain and controlled by individual users. But these NFTs are not just ownership certificates attached to snazzy JPEGs: They have utility in the game.

Besides the AXS tokens required to start playing, the game also has SLP, or smooth love potion, tokens. Players earn SLP when they win a match. They need SLP and AXS tokens to breed their Axies, which can be later sold or bred again.

For years, there's been a question of when a consumer-friendly application for crypto will become mainstream. There's an argument that NFTs are doing this for collectibles — see Dapper Labs' NBA Top Shots. But gaming could become the real killer app, crypto insiders and investors believe.

There's precedent for games pushing a new technology over the top. Remember when FarmVille helped lock in Facebook as the top social network, or how mobile games became critical to the iPhone's success?

And more is at stake than just redefining gaming. Crypto tokens associated with a popular game could redefine financial services. Already stores in the Philippines accept one of the tokens, SLP, as payment. If retailers have any qualms about accepting virtual smooth love potions, they aren't showing it. "Games are a Trojan horse to enable access to consumer finance and digital payments," said Andrei Brasoveanu, partner at Sky Mavis investor Accel.

While Sky Mavis is not focusing on financial services, some could emerge from what the company is building, Brasoveanu says. Sky Mavis says 50% of its users have never used crypto before, and 25% have never had a bank account before.

"The people who come into Axie get their first account, but they also get their first wallet, and that wallet is then the access point to the decentralized financial ecosystem," said Sky Mavis co-founder Aleksander Larsen. "And eventually, it could also even be to the broader financial ecosystem, because that's the first time they can actually own their assets."

In non-crypto games, characters and digital goods are controlled by the game developer. But in Axie, players control their NFTs. And they can buy them from other players, with Sky Mavis collecting a 4.25% fee.

Unlike the older model of "attention-based" mobile and online games, where developers use psychological tricks to keep players hooked, these games give an incentive to play, since the assets can be traded instantly, said David Pakman, managing partner at CoinFund.

An obvious risk is fraud. In its terms of service, Axie warns that even with transactions using its wallet, "We will have no insight into or control over these payments or transactions, nor do we have the ability to reverse any transactions." That's inherent in the design of most blockchain systems, where there are few provisions for chargebacks or refunds.

Another risk is that the fun aspects of the game get overtaken by speculation or gambling. Larsen says he has seen fake Axie apps and phishing attempts and hopes to tamp those down. But players are taking high risk along with the potential for high rewards, he says.

"The only way [these economies] can become bigger is if people have real skin in the game. And if they have real skin in the game, the risk is also high," Larsen said.

One example of the dangers involved in crypto gaming is the squid token inspired by the hit Netflix show "Squid Game." Its anonymous creators apparently scammed token buyers out of at least $12 million. Users had to play a game in order to be able to sell the token. It's unclear how big of a part the game played in the token's appeal, but it shows that in a new sector of gaming where users are putting their own money into an untested area, risks abound.

Money vs. fun

The financial incentives of the game are fundamental to Axie Infinity and those incentives drive some of the interest. A certain segment of the user base is playing the game to earn income, particularly in less wealthy areas. Some 40% of the game's user base is in the Philippines. There are reports of people ditching service-sector jobs to play and earning as much as $2,000 an hour.

Larsen says money is not the only reason people play. Some connect with the community, some see it as part of their digital identity and some just like playing, he said. Fewer than half the players are focused on the game's monetary aspects, according to Sky Mavis surveys, Larsen said.

One appealing aspect of Axie's structure is that the game account is separate from the wallet, which means people can loan out their game accounts and not lose what's in their wallet. There is an ecosystem of "scholarships" in which organizations known as guilds loan out their Axies and take a 30% to 40% cut of the profits from the player. One large guild is Andreessen Horowitz-backed Yield Guild Games.

Pakman sees guilds as a positive, since they prevent a "kind of caste system" that could otherwise develop between haves and have-nots. Meanwhile, it's not hard to see other types of lending, equity or credit models emerging in play-to-earn games. That's different from conventional games, which sometimes ban users for attempting to lend or trade accounts.

Valve recently jumped into this issue, declaring a ban on applications that use crypto or NFTs, which could limit the mainstream adoption of crypto gaming in the short term. But that doesn't scare Larsen. "It's just great for us because it opens up a larger opportunity. It makes people more aware of it," Larsen said. "I feel like it's a very defensive way of thinking about it."

Sky Mavis is developing a free-to-play, non-crypto version on mobile that would be in app stores and could serve as an introduction to the crypto version. But more broadly, Larsen believes that play-to-earn opens up a new opportunity for people to more strongly connect to the game and own their data.

"NFTs are the beginning of your digital identity. It's actually about owning that part of yourself — the things you do online," he said. "That has never really been possible before. That shouldn't be beholden to the fact that you're using Steam or Epic Games or whatever. That's your stuff."

Larsen says gamers could more easily transport their gaming history or other online activities which are often lost over time. "I'm a gamer for 20 years now, playing competitive games … How cool would it be if I have that in my wallet?"

But if you really own that data, can you take this identity with you elsewhere online, say, to other games? Not yet, but Larsen hopes systems to allow for that will evolve: "That's how I see the metaverse evolving: some third party making a massive game or a massive universe which draws in all NFTs from all different types of platforms."


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