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Is Axie Infinity a Ponzi Scheme?
This is the second part of my Investigating the Axie Phenomenon series here on Cryptoday.
Last Friday’s newsletter reached a lot more people than I was expecting (6,000+ shares on FB and 100k+ impressions on Twitter, wow!), and I saw a few commenters calling Axie Infinity a ponzi scheme and accusing me of promoting a scam. But rather than be offended, I wanted to spend the next few essays really dissecting the Axie business model. I’ve been in the crypto industry long enough to remember people calling Bitcoin a ponzi scheme, and it took a long time to convince them that that wasn’t the case. Axie deserves a similar amount of consideration. So, is Axie Infinity a ponzi scheme? Let’s dive in!
The accepted definition of a ponzi is an investment scheme that has no engine for generating value, and simply pays existing investors using money from new investors. With enough fresh money coming in, the promise of high returns feels very real to the earliest participants, which is what entices new investors to join in. Eventually though, the investment scheme collapses because it can no longer find enough new investors to keep the current base happy. Ponzi schemes are popular here in the Philippines because they actually work really well … as long as you’re an early adopter, and you don’t have any ethical concerns about lying to your friends. Last year we saw the first examples of decentralized ponzi schemes emerge on the Ethereum blockchain: Forsage and MillionMoney were two of the biggest ones. They were so big in fact that, at one point in the summer, these two apps accounted for over 10% of all the transactions on Ethereum. It is therefore NOT an invalid fear to think that Axie Infinity, with its high rates of return, is some fancy new form of decentralized crypto ponzi, so I don’t begrudge anyone who initially thinks about it that way.
But let’s go through what we know of Axie Infinity and see if it matches up with the ponzi definition above. Let’s start with the current investors: there are probably about 150,000 Filipinos on the platform. And there’s certainly A LOT of new money coming in right now — people are investing in axie teams, starting breeding farms, or organizing their own private guilds of players.
Are the new investors just paying off the old investors? With Axie Infinity, there are a couple of roles that generate value within the game: Breeders custom-build axie teams with specific characteristics. Breeding takes time, money, and luck, and a better team piloted by a better player will win more duels. Managers consolidate players and axie teams, packaging these as micro-enterprises for small-time investors. (Interestingly, the players themselves are NOT value-generators, they’re value-extractors. Once they’ve earned their tokens, their expected action is to exit the ecosystem by exchanging their earnings for pesos.)
Let’s go back to our ponzi definition: “Eventually, the investment scheme collapses because it can no longer find enough new investors to keep the current base happy.” Thinking about how this doomsday scenario maps on to Axie Infinity is a great way to reveal the underpinnings of the game’s economy.
Let’s assume that no more new players join the Axie ecosystem. What happens? Without any newcomers, the breeders won’t have much reason to continue breeding new teams, since everyone who has been playing long enough will have more axies than they need. So the breeders will drop off, and the SLP exchange rate will go down as the demand decreases. The players can continue to play and earn SLP every day, but it will be worth A LOT less than its current 11-peso price. What happens then? Well, two possible scenarios: In the optimistic scenario, the low price of SLP will make the game more accessible to new players who have always wanted to try the game out but had limited financial capacity. And with enough of those new players, the economy will start to recover, prices will start to rise again, and eventually all the breeders will come back online.
What about the pessimistic scenario? With no SLP demand, the token goes to near-zero value, and players will be left playing … well, a normal game. If enough players find the game fun and interesting, they’ll continue to compete for bragging rights or stream viewership. But all of the people who originally invested in axie teams would find their investments worth very little and be hard-pressed to liquidate them. Before you start panicking, I should say that the pessimistic scenario can only really happen if SkyMavis gives up on the game completely, because there’s quite a few ways to reignite a waning customer base. For example, if the axie population is too high, you could forcibly retire older axies, preventing them from being playable after enough time has passed. Not a great solution, but definitely possible if the fate of the ecosystem were at stake.
So let’s go back to the original question: Is Axie Infinity a ponzi scheme? I don’t believe so, and I’m basing that assessment primarily on the outcome of our pessimistic scenario described above. The game itself will continue to be a source of entertainment, regardless of whether players are earning from it or not. Entertainment has value, and our time and attention have value. On a very basic level, Axie players (indeed, all gamers) are exchanging their time for entertainment, and that will continue to be true even if the SLP they earn is worth nothing. As painful as this sounds, even if Axie Infinity fails completely as a play-to-earn platform, it will still be a game on your phone that you can load up whenever you have a few minutes to kill. It probably won’t be worth a lot, but it won’t be worth nothing.
On Wednesday’s letter, I’ll be talking about the practical steps I took to enter the play-to-earn space, and share some numbers about how well those investments are doing. And if you’re starting to miss my general crypto markets discussion, don’t worry, I’m just mixing things up this week but will go back to the market briefings very soon!
Have a great Monday, cryptofam!