Vietnam’s startup darling Axie Infinity is in the news. Like the United States on the back of trillions of dollars of newly printed dollar bills, Axie Infinity is suffering from a classic economic problem: inflation.
Here’s the skinny.
Axie Infinity is a blockchain item, based on Ethereum, where it uses a couple of different technologies. First, cryptocurrency. Twice. Axie Infinity uses a standard cryptocurrency, AXS, that is purchased using other external currencies: either fiat or a recognized crypto currency. With AXS purchased and in the bank, users can then buy Axies, which are NFT monsters (the second blockchain technology). This cryptocurrency is limited and is only used to purchase goods in the game, it is not used to pay back to players or even to cash out of the game, though individuals who possess AXS can trade it on crypto exchanges or for fiat.
It falls to the second cryptocurrency Smoot Love Potions, or SLP, to provide the actual in-game economic driver. Once players have bought into the game with AXS they earn SLP by accomplishing tasks, fighting other Axies, and a few other things. From the inception of the game, SLP was unlimited, it was given out to anyone who accomplished the requisite activities, and there were no restrictions on how much of it could be issued. With enough SLP earned, a player could cash out onto a crypto exchange for fiat or other crypto. Thus the model of play-to-earn.
But the unlimited issuance of SLP created a problem. With millions of players earning unlimited amounts of SLP, its scarcity plummeted and then so did its value. From a peak of .44USD a coin, it sank this last week to approximately .01USD a coin. But before I get into the externals, it is important to note that within the last few days Axie Infinity has announced plans to limit the further issuance of SLP, make it harder to get, and possibly start issuing certain amounts of AXS within the game. Like a reactive central bank, this has acted to plump the value of SLP and AXS and the cryptocurrencies have seen an increase of upwards of 17% in the last couple of days.
But why does this matter when only those few people who actually play the game care?
Because of who those people happen to be.
In what was, I suspect, an unintended consequence of the play-to-earn model, Axie Infinity has become a digitally outsourced income generator for rich country investors.
In order to join the fun, a player has to pony up a sizable buy-in before they own the three Axies required to play the game. When AXS was at its peak, this cost close to a thousand dollars, an investment that much of the world was incapable of fronting. But the amount of money that a player could earn in any given day, at its peak around 70 or 80 USD, was not sufficient to lure in the players who had access to the initial capital necessary to play the game. It was, however, more money than people in, say, the Philippines, averaged in a week of hard labor. Playing Axie Infinity, for them, seemed like an easy income that would bring immense wealth compared to the average yearly income of a few thousand dollars. But how could they get the money to buy those first three Axies?
Like any good oil well, they needed to find some fat cat investors who would be willing to pay the buy-in and take a cut of their earnings as repayment, plus interest, on their investment. Even at a 30% take of the daily earnings at 70 USD, the remaining 40 USD still meant a sizeable increase in the salaries of people in several developing countries.
What happened, then, was the development of “sponsorships” in which American or European investors “sponsored” a sweatshop player to play the game and feed the play-to-earn model, and they would reap a continuing return on their investment. I haven’t seen any of the “sponsorship” agreements, but the imbalance in party sophistication is obviously immense. What is a dirt poor farmer in a developing country supposed to do when a rich white guy from Texas agrees to sponsor them?
There does not appear to be a standardized procedure for sponsorship nor an Axie Infinity approved contract. A quick Google search shows that potential players are seeking out sponsorship through whatever means possible, whether that be Facebook or Reddit or Twitter or some other online venue. From everything I’ve read this last week, there seems to be no governance of these sponsorships and no support for players in their negotiations with sponsors.
One does not have to be a pre-Perestroika party member to realize that such an egregious imbalance will inevitably lead to abuses. And as the majority of the players on Axie Infinity are from developing countries with sponsors, this abuse is very likely widespread and endemic.
As I mentioned above, I am giving the founders of Axie Infinity the benefit of the doubt in assuming this external business model was an unintended development and that it was not the goal of the startup from the beginning. With that caveat stated, the reason for my writing this week’s post is to use my small online fiefdom to encourage Axie Infinity to act not just to adjust the internal economics of the SLP and AXS cryptocurrency, but to institute some kind of minimal governance standards for players and sponsors. A form contract or required disclosures on the part of sponsors. I know it is impractical to offer legal advice to every potential player, but there is a great deal which Axie Infinity can do to level the playing field between sponsors and players.
To continue with an ethical and moral agenda, Axie Infinity needs to address this terrible inequality that has arisen as a result of their play-to-earn model and seek a balance that will protect their players from abuse and exploitation.