Is Axie Infinity a Ponzi Scheme?

Happy Friday!

Today I have for you a steaming hot plate of Axie Infinity analysis, served two ways. First, a thousand words from me on whether the “play-to-earn” game’s business model is built like a ponzi scheme. Then, something new and special: a thousand words from the one and only Ryan Broderick of Garbage Day fame, on his experience trying to actually play the game!

(I love Ryan’s writing, so this is a real treat. If you aren’t subscribed to Garbage Day you should do so immediately.)

Bon Appetit!

Is Axie Infinity a Ponzi Scheme?

by Nathan Baschez

This year I learned there is a very fine line between a legitimate business and a ponzi scheme, thanks to a “play-to-earn” game called Axie Infinity. It exists in a weirdly fascinating middle ground that I never thought possible. And it has a chance—although I am skeptical—to pull off an incredible bank shot, and leverage an initially ponzinomic model into a sustainable one.

Normally in a ponzi scheme you make up some lie to get investors to give you their money. For example you might claim you discovered an arbitrage opportunity to buy stamps for cents overseas and sell them for dollars in the US, as Charles Ponzi did back in 1919. Then, when investors give you their money, you just sit on it instead of actually running the stamp arbitrage operation. When they ask to cash out, you give them their funds plus some portion of funds from new investors to account for their “profit”. This makes your lie believable, which causes more people to invest, which increases your ability to make payments to previous investors that want to cash out.

The key is to attract enough inflows from new investors to cover payouts to old investors. Eventually this becomes impossible, because there are only so many people in the world. But you can keep it going for a surprisingly long time! Ponzi ran his scheme red hot and got caught in just under a year, but Bernie Madoff was cool and calculated, offering modest returns that kept the scam going for anywhere from two to three decades—nobody knows exactly when it started.

The interesting thing about Axie Infinity is that, just like Ponzi and Madoff, it has a fundamentally unsustainable economic model that depends on inflows from new players to fund payouts to existing players. But here’s the weird, mind-bending part of it: everybody knows! The team knows, their investors know, ordinary players know—and they talk about it all the time!

The Axie economy works like this:

1. New players want to play the game because they heard it was a good way to make money. Some percentage of players come purely for fun and don’t expect to earn income, Axie insists, but they haven’t released any data that would make me think it was a substantial portion of their user base. According to most credible reports, the vast majority of players live in places like the Philippines and Venezuela, and treat Axie as a job, like driving for Uber.
2. In order to play the game, you need to either buy your own Axie—a Pokemon-esque creature you use in battle—or rent one from somebody else in exchange for ~30% of your earnings. Axies cost as little as $60 right now, but some cost much more, due to either special battle abilities or OG-status. You need to have at least three Axies to play the game.
3. Once you assemble your Axies, you can bring them out to battle. If you win, you earn a cryptocurrency called SLP (smooth love potion).
4. Here’s where you end up making money: you can either use your SLP to “breed” new Axies, which you can then sell to other people wanting to start playing the game, or you can just sell your SLP to other people who might want to buy it so they can breed Axies.

As I said, it seems like everybody in “Axie Nation” knows the music stops if the inflows of cash from new players fails to pay all the existing players who have made this into a job. There’s a page in the official whitepaper that talks about it, and a cofounder even said in an interview, “Am I surprised we’ve gotten this far without Axie upgrading [an idea to make it less ponzinomic] and things like that? To be honest, yes I am.”

So why doesn’t the game economy collapse?

In short: people keep participating and buying in because they are betting Axie can figure out a way to make it sustainable. It’s kind of like if the original Ponzi was more honest and pitched the scheme as a way to raise funds and build an audience he could leverage into a sustainable business. The way Axie plans on doing this is to try and grow the percentage of players who are there to spend money because they want to have fun, and aren’t there to take money out of the game economy in order to pay their bills. 

There is some precedent for this, of course! Entrepreneurs start with unsustainable models all the time that can be tipped into sustainability given some initial capital from sympathetic investors. For example, any business selling any kind of physical product is surely “growth-dependent” in the early days, before they reach economies of scale. (Although it’s worth noting that this problem gets better with growth, while Axie’s gets worse.) And as for attracting “spenders” to offset the “earners,” think of it this way: people spent ~$180 billion on video games in 2021. Axie’s logic is if they can attract even a tiny slice of that pie, they should be able to balance the equation.

So, how is Axie’s effort to attract players who want to play to spend and have fun, rather than play to earn, going so far? 

Judging by their public statements, not good. If you want to understand what a company is struggling with, look at where their rhetoric is the most unhinged and laden with denial. Just as Google bends over backwards to insist they are a modest fish in the giant sea of internet advertising (to deflect concerns that they are an unregulated search monopoly) and Facebook insists they are making the world more open and connected (to deny the reality that they make the world more closed and angry), Axie’s founders like to claim they are building a “new type of society.”

As one of Axie’s co-founders explained in a recent interview:

“We need to think about Axie as more than just a game. We can see it as an entire civilization with an economy, even a language, right? There are certain things that Axie community members say that only makes sense to other Axie community members. We have our own culture and entertainment. When you think of it like this, it’s a little bit more complex. We’re just in my opinion at the start of building this really advanced and new type of society that hopefully will last for decades or hundreds of years.”

(When I read this quote aloud to my wife she said what I think we’re all thinking: “You have to be smoking so much shit to be talking out of your ass that much!” 😆)

In reality, Axie is not a nation. It does not have a functioning economy. It’s more like a well-intentioned small-town employer that is struggling to pay its workers, because the primary thing the workers do—play Axie—does not create sufficient economic value.

But maybe I shouldn’t be so pessimistic. Maybe they can do it! They just raised $152m from a16z, they have a big treasury of crypto assets, and an even bigger community of people with a strong incentive to help.

But still, they’d better hurry 😕 Ponzis only work while things are going up. As soon as the flywheel starts spinning in the other direction, the entire scheme can unravel quickly.

The day the boss stops handing out paychecks is the day workers stop showing up.

Data source: CryptoSlam

Axie Infinite Jest

by Ryan Broderick

If you aren't familiar with the term “Web3,” or, more likely, have heard it and are terrified as to what it could mean, it's a movement led by cryptocurrency and blockchain enthusiasts who want to create a new version of the internet built on the blockchain, a semi-automated somewhat-decentralized digital ledger that records online transactions. 

The current Web3 boom over the last year has already attracted enough money and attention that there are at least parts of it that will probably stick. In the same way, 15 years ago, that the internet filled up with Google Glass-bespectacled thinkfluencers and “digital evangelists” telling everyone to make accounts on bright and colorful social networks with rounded CSS corners and names like Blorp or Skloom or Nequickle, so too are we at a moment where we seemed to have figured out what the hot new thing is and have then become inundated with the dumbest rough drafts of what will eventually be the new normal.

There has been one project, though, in the crypto space, that I’ve been extremely curious about. It's called Axie Infinity and, according to a Rest Of World deep dive into it from August, the NFT-based video game is helping players in countries like the Philippines make thousands of dollars a month. This week I finally sat down and messed around with Axie Infinity, though, admittedly, I didn't get as far as I would have liked.

It’s built on top of a crypto wallet called Ronin. So before you make an account on Axie Infinity, you have to set up a Ronin wallet. Once that extension is installed in your browser, you can make a login for Axie Infinity, which lets you access the game. But here's the big problem: You can’t do anything in the game without its playable characters, which are called Axies and Axies cost money. 

Axies are like Pokémon. They’re little blobby monsters that you can trade, fight, and breed. New players need to head to the game's marketplace to buy some before they can start playing the game. As of Friday morning, the cheapest Axie for sale cost $43. And you need at least three to really play the game. And to buy them you need to deposit Ethereum into your Ronin wallet from another wallet, like Metamask. And if you use a broker like Coinbase to buy and trade crypto, that means you'll need to transfer Ethereum at least three times before you own your first little monster. Also — and this really pissed me off — there were gas fees for trading between the Metamask and Ronin wallets! When I tried to transfer a bit just to buy an Axie, it wanted to charge me $100 in gas fees.

As for the gameplay itself, Axie Infinity is surprisingly complex. Axies have different classes, different body parts, which are breedable, and abilities presented in the form of cards. The game is more similar to something like Hearthstone or Mega Man Battle Network than I expected. It currently has two main modes, an adventure mode where you and your Axies battle through increasingly difficult enemies, and a battle mode, where you fight other players. Every single YouTuber I’ve found making tutorials about Axie Infinity has warned that you will get completely obliterated in battle mode if you don’t have very high-level Axies. Fun. When you finish a fight in adventure mode, you win what's called Smooth Love Potion, which allows you to breed Axies.

You can grind adventure mode, earn Smooth Love Potion, and then either sell it to players or use it to breed your own Axies, which you can then sell on the marketplace. Or, if you’re rich in Ethereum, you can hire a bunch of players to do all that for you. You see, the general consensus is that you need about $1000 to really start playing Axie Infinity, which has given rise to guilds and scholarships, which are either a great system for onboarding new users or a terrifying hybrid of a predatory lender and debt slavery built on a collectible cartoon monster game. Whether or not this all sounds deranged and terrifying depends on how much time you wasted on World Of Warcraft back in the day, I suppose.

In the effort to be fair and balanced, here are two generous takes on the whole Web3 movement that Axie Infinity is at the forefront of right now. The first comes from author Robin Sloan's recent post, “Notes on Web3,” who writes:

I think Web3 is propelled by exhaustion as much as by excitement. This isn’t apparent on the surface, but I believe it’s there, lurking just below. If you are 22 years old, Twitter has been around for about as long as you’ve known how to read. YouTube is fixed as firmly as the stars. I honestly don’t know how that feels, but I wonder if it’s claustrophobic?

This, I think, is a decent argument. Gen Z is here, they are online, and they want to change things, like all new young cohorts. Let the youth gamble on Pokémon! And, perhaps, 10 years from now, we'll look back and cringe at things like the Lazy Lions NFTs, or whatever, the same way no one talks about those “What Should We Call Me” Tumblr blogs from the early 2010s that just posted reaction GIFs. It’s possible! I already find Adidas’s recent NFT/metaverse project so embarrassing I could barely look at.

The other argument for Web3, one that I think is a bit generous, but worth considering, is that Web3 solves a central problem with the way we’ve made money online for the last three decades: scale. In an internet determined by advertisers, everything must reach a level of scale that is both impossible to maintain, and possibly unhealthy for society. I’ve attempted to find advertisers for my own newsletter and the problem I’ve run into is that advertisers can reach more people for less money by running their ads on Facebook or Twitter or YouTube. So Web3 projects are an easy way to bypass that problem. No advertisers? All you need are a thousand people with some Ethereum and dumb idea. And, as we come closer to the anniversary of January 6, I am finding it harder and harder to believe that having as many people as possible on one website — at such a scale that it becomes impossible to moderate — is a good thing.

To bring this back to Axie Infinity, it’s a decent game and, honestly, better than most blockchain products I’ve played around with, but my overall verdict is that all of this would be better without cryptocurrencies involved at all.

Over the last few months, I’ve become increasingly sucked back into Pokémon Go, the app responsible for the closest thing millennials have to baby boomers’ summer of love. The game is a lot more stable in 2021 than it was at its initial launch. It also now integrates with a cloud storage service called Pokémon Home, which allows you to build a global index of all your Pokémon across every game. And Pokémon Home has an online stock market-esque trading feature called the Global Trading System, or GTS, which has subreddits dedicated to lining up sought after trades. Which means, right now, there is a pretty serious online economy for Pokémon. (A Pokémon called Furfrou is currently the most popular Pokémon on the marketplace.)

This entire Pokémon ecosystem doesn’t have a direct way to make actual real money. And it's likely it never will. But it does give you a glimpse of how much more stable something like Axie Infinity could be if it didn't rely on cryptocurrency. But, perhaps, for Axie collectors, the speculation and financial chaos are just part of the game.