So everyone seems to think Axie Infinity is the “next big thing” in crypto. After all, it’s making more money than ethereum and bitcoin right now.

But I think it’s going to fail.

Here’s why.

Yes, it’s growing like crazy right now.

The game has 300k daily active players, 30x growth from beginning of the year. Revenue is higher than all projects combined in DeFi.

The value prop for users is you can make money playing the game.

It’s arguably the first success story of the “play to earn” model. You play the Axie game, which is like Pokémon. You earn the in-game token, called SLP. You exchange SLP for ETH or “real” money.

How does it work exactly?

To play the game you need to buy three axie NFTs, which is like a team of Pokémon. When you play, you earn SLP, which you need to breed more axies.

In other words,

Buy axies—> Play to earn SLP—> Sell SLP or use SLP to breed new axies —> sell axies.

How much money can you make?

Average player can make 150 SLP a day w/ 3-5 hours of playing. Right now SLP trades at $0.29. So you make $9-$15 per hour. Do this everyday and you make > $1000 / month. That’s better than a middle-class salary in a low-income country like the Philippines.

No wonder Axie is trending in developing countries with large population. Some stats says 60% of players are from the Philippines right now.

So is this a Ponzi scheme?

First, the development team is NOT out to swindle anyone. They worked hard to try to build a true metaverse ecosystem that benefits everyone.

Unfortunately, how the economics works now is exactly like a pyramid / Ponzi scheme.

Why does SLP token have non-zero price? Because you need it to breed new axies. Why do new axies have non-zero price? Because new players need to buy them to get started. That is, player earnings entirely rest on new people coming into the system with new money.

The day when no new players flow in, SLP price will drop like a stone. So do your earnings.

But isn’t this true for all of crypto?

You may say this is no different from yield farming in deFi, and you’ll be right.

The “play” part in “play to earn” is a mere pretense. You can take that away and nothing will change about the economics.

Imagine if we change the game this way: instead of buying 3 axies and play battle games for a few hours to make 150 SLP, it allows you to buy 3 axies, sit on your hands for a few hours, and get 150 SLP in due time.

You get exactly the same “earnings”, as long as new players keep paying their entry fees. The act of “playing” (or work, if you do it as a job) creates no value on its own.

The real problem is you need a network that is valuable for its own sake.

People say cryptos should be valued by “network effect”. But it actually depends on what kind of network you have.

Telephone and internet are big networks. But pyramid schemes and multi-level marketing (MLM) are big networks, too. For a period you see users grow exponentially in both types. What’s the difference?

In the former, people value the activities within the network on their own. In the latter, the network activities have no intrinsic value and you participate only to make money.

The number of users is not evidence of network value. You need to look at what users are doing on the network.

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The real problem with Axie Infinity is it’s not a good game.

There’re a lot of high quality games out there with large communities. People join because they love the game.

That’s not the case with Axie. The concept is copycat and the quality is meh. If SLP price drops to zero, not many people would be playing (let alone paying to play).

This is the problem with most of the metaverse / play-to-earn projects in crypto today— they are not fun to play and can’t stand on their own!

How do you make a play-to-earn system sustainable?

The future winners of play-to-earn model will be platforms that already have a vibrant community without money involved. Once you have that, you can create community tokens and earning incentives to supercharge network growth.

An example. People already love watching Disney movies. Now if Disney creates a “watch to earn” program, everyone would sign up. It would 10x growth, as long as Disney keeps making movies you actually love to watch.

But any single game, no matter how popular it is today, would have problem creating a sustaining ecosystem because game trends come and go. You’d need to keep adding new games and different ways to play, just like Disney keeps making movies.

Can Axie Infinity improve their game and add new ones to build a sustainable system? It’s possible, but I think highly unlikely. Because it’s actually a major disadvantage that they started the game with a play-to-earn model.

Once you introduce money incentives, you get a skewed picture of how good your game actually is. Even if your game sucks, you never get that feedback from users. All you see is users keep going up and people seem to be loving it.

The skewed data means on balance you’d be less motivated to improve the game itself— why fix if it’s not broken? Even if you want to improve, you have no accurate feedback to tell you whether you’re getting hotter or colder.

But just like in a Ponzi scheme, new user inflow eventually plateaus. When the tide goes out, you discover you’ve been swimming naked all along. But by then, it’s too late.

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  1. Hi Tasha, really love your content, on axie infinity, i get you that the value of the axies is only dependent of new comers who want to play the game, this is not entirely accurate, people who have already accumulated some axies, will still buy more axies to play the game to accumulate more because they believe the demand will consistently increase (recency bias), that will then create a feedback loop, and remember, blockchain games are composable, If Im a axie whale, im incentivized to create another game that requires axies to be played.

    • The real demand from existing players are more limited. Normal players only need 3 axies. Unless you’re building an army, which you’d be incentivized to do only if new players keep coming in. So it once again is a story of relying on new players. Re composability: sure this can happen. But all the crypto games right now are pretty crappy and as mentioned above, incentivizing people w/ monetary gain from the get go does not help building a better product.

      • Does this make sense? Why is it more limited? If playing earns, then why would stick with only 3 axies? This reply seems to suggest that most players will stick with 3 axies, meaning that growth is dependent on new players. But the original reply suggests that existing players will keep accumulating axies to earn more. This makes sense to me and I can’t see any rationale in Tascha’s reply as to why this would not happen and why this demand would be “more limited”.

    • This simply says you can make a lot of money right now playing axie infinity, which we already know. It has nothing to do with whether the system will sustain in the long run. in its current form, it won’t. b/c the thing mostly relies on new players coming in, as already elaborated in my post.

  2. This is the best bear case I have read on Axie. Though, I think it’s similar to BTC in that it was the first break through project in it’s category and is too big to fail in the near term (1-3 years). Also, the monetary incentives/investors who are banking on its success will make it a success…So, in other words, I actually don’t think it will fail (go to 0 or lower than its current levels), but I definitely agree that some other PTE game will take over in the next 3-5 years that grows without incentives because it’s fun and then will go through hypergrowth with the introduction of tokenization.

  3. Mykhel Reyes Reply

    The whole Axie economy is fairly fragile and not sustainable. A Ponzi scheme has been built on top of a legit game. While the team could have let the game grow organically they have chosen to implement the described incentives.

    I’ve been asked by people in the community to propose solutions instead of only applying criticism. In my view, the only moral solution is to stop giving out SLP rewards and thus, ending the unsustainable incentives that are not backed by real value creation.

    The team seems to think that they will be able to build further services on top of the game to eventually reduce the amount of Axies in existence and thus, preserve the value of SLP.

    While there is a certain POSSIBILITY for that scenario to play out, it does not by any means justify running an unsustainable scheme in the first place. The people that invest in the Axies economy could be the ones that eventually have to pay for that risky endeavor.

    To conclude, the sheer HOPE of building a valuable service on top of a Ponzi does not justify running it.

    It’s mindblowing to me that either I am missing something obvious or that every credible crypto investor is not paying attention to how Axie Infinity really works, blinded by the scenario of NFTs going “mainstream”.