In addition to the seismic shifts that the blockchain continues to effect in the world of finance, it has recently begun to make its mark on the gaming industry as well. Most notably, the blockchain has served as the birthplace of a new business and monetization approach for video games that has come to be known as the play-to-earn model (P2E). To understand P2E as the next – and arguably the most economically robust – evolution in the world of gaming, it is worthwhile to consider both the gaming industry’s past as well as its potential future.
Accordingly, this article will address the following subjects:
The earliest approach to monetization in the gaming industry, tracing back to arcade machines and the first home consoles, was the pay-to-play (P2P) model. Quite simply, this model granted gamers full and irrevocable access to game content in exchange for a one-time payment. Variations of this model continue to be popular today. In particular, many game developers have taken to selling only a subset of their overall game’s content for an upfront fee and packaging the remainder in the form of downloadable content, season passes, and loot boxes, all of which can be purchased at the gamer’s discretion.
A relatively recent spin on the original P2P approach has come to be known as the free-to-play (F2P) model. Rather than requiring an upfront payment to be given access to a game’s base content, the F2P model grants full access to the base game at no cost to the gamer. Where revenues are realized for the developer, however, is through the recurring sale of in-game items. These items can range from purely decorative skins to unique character upgrades and have become a staple of modern gaming, forming the monetization bedrock of such popular titles as Fortnite, League of Legends, and Clash Royale.
All of the above culminates in the latest progression of gaming business models and the primary focus of this article: play-to-earn (P2E). This model differs from its predecessors in that it centers on making gamers the primary beneficiaries of a game’s success. Not unlike games sold under other models, P2E games reward users for their active engagement in the community with in-game assets. Where P2E games deviate from other models is by creating an active secondary market for these virtual assets, enabling users to exchange rewards they have earned in the course of playing the game for cryptocurrency, which in turn can be translated into real-world fiat money.
Interestingly, it should be noted that the P2E model is not an entirely novel innovation. Long before the blockchain began to power fully self-sustaining virtual economies, individuals living in the economic ruin of such nations as Venezuela and China had monetized their in-game efforts by selling virtual goods for fiat currency in a practice known as gold farming. This crude form of P2E has never been sanctioned by game developers and almost invariably amounts to a violation of each game’s terms of service. In contrast, modern P2E blockchain games are built with the express purpose of rewarding users in a tangible way, including helping them survive the hardships of failed real-world economies.
The fundamental difference between F2P and P2E games is immediately made clear when the two models are examined from an economic lens. In the virtual economies of F2P titles, gamers can purchase cosmetics and character upgrades, yet they have no agency to resell them – effectively, it is as though the gamer does not have true ownership over what they bought. Should the individual grow tired of an F2P game, they will not be able to recover any of the time or funds invested into leveling and customizing their character. In contrast, the costs of earning virtual goods in P2E games are recoverable. This is thanks to the blockchain infrastructure atop which P2E games are built. By running games on a blockchain – some of the most popular for the P2E model have been Ethereum, Wax, and Hive – gamers can store their virtual goods in a wallet and use them at their discretion. Whether they elect to reinvest their virtual goods into their in-game characters, or liquidate their positions in exchange for cryptocurrency, gamers are granted unprecedented choice in how they derive benefits from their time spent in P2E games.
One stark example of how the P2E gaming model can substantially shift an economy has emerged in Cabanatuan City, located in the province of Nueva Ecija, Philippines. A country hard-hit by the COVID-19 pandemic, the GDP of the Philippines contracted by a national record of 9.6% in 2020. This left many Filipinos, including the citizens of Cabanatuan, with little means of earning income. The eventual discovery of a popular P2E game, however, would soon change many peoples’ fortunes; this game was Axie Infinity.
Arguably no game has realized the full potential of the P2E model, both in terms of building a robust in-game economy as well as improving the socioeconomic status of its users, better than Axie Infinity. Created by Vietnamese blockchain development studio Sky Mavis, Axie Infinity revolves around the collection of small, NFT-based creatures known as Axies.
Players work to improve the strength of their Axies by deploying them into combat in player-vs-player settings. In addition to combat, players can breed Axies to create unique genetic variations, buy and sell land, and trade their Axies and in-game resources as part of a player-owned economy. The game has gained impressive traction, recently generating USD$200M in revenue over a 30-day window; this was more than the combined revenue of its 10 closest peers over the same period. Part of Axie Infinity’s success can be traced to the thoughtful pricing mechanics that help regulate the prices of its in-game assets.
The upfront cost to play Axie Infinity is fairly steep, however players who approach the game with tact and dedication should have little trouble in breaking-even and ultimately turning a profit. To enter Lunacia, the fictional setting of the Axie universe, players must form a starter team comprised of 3 Axies. Looking to the official Axie marketplace, the cheapest Axies available at the time of writing commanded prices in the realm of USD$200 - USD$300. Naturally, users looking to assemble a starter team not formed of so-called “floor Axies” should be prepared to pay significant premiums. Barring any significant changes in price, new players can expect an initial outlay of no less than USD$700 worth of ether.
Based on historical precedent, new players entering the game should not expect floor prices to remain at this USD$700 level. The price of Axies has risen dramatically over the previous 2 months, with floor prices rising by a factor of 5X, and this trend will persist as interest in the game grows. The evolution in prices can be seen in the below chart, which demonstrates the growth in prices for Origin Axies – of which only 4,088 are in circulation – as well as MEO Corp. Axies (available in limited-time rollouts) and the cheapest floor Axies:
The question many entrants into the Axie universe are keen to have answered pertains to how long they can expect to play before realizing a positive return on investment. Fortunately, with a number of alternatives for recouping the initial cost, the time to payback for many players should be relatively short. The primary method for earning money in Axie Infinity is by farming $SLP, the game’s native currency which will be discussed at length in the next section. Users can earn $SLP by winning battles and completing daily quests. With payoffs ranging from 1 – 50 $SLP for every objective achieved, players can expect to earn something to the tune of 250 $SLP each day. At the going exchange rate of USD$0.206/$SLP, players looking to immediately take profits can realize as much as USD$50 on each day’s earnings. That being said, enterprising players are sure to capitalize on other in-game revenue streams including breeding & selling Axies as well as speculating on real estate.
In fact, the highest earners in the Axie universe leverage some well-documented strategies to maximize their returns. For one, in addition to consistently farming $SLP in the aforementioned methods, the savviest players will defer the gratification of earning real-world money and instead reinvest their $SLP earnings into breeding new Axies. Doing so strategically can yield Axies that are better-equipped to win battles, and by extension can generate a greater daily inflow of $SLP. The most prolific Axie breeders have taken to operating large-scale breeding farms, where they aim to increase the number of Axies owned and new Axies bred through multiplicative reproduction. A well-regarded strategy that the operators of breeding farms use is known as the ABC method, wherein players begin with three Axies that are not immediately related (i.e., neither parents nor siblings), breeding Axies A & B twice, then breeding Axie C twice with one of A & B’s offspring. The cycle repeats with A & B’s other offspring and the second generation of Axies. But above all else, the most lucrative earnings strategy in Axie Infinity is the Axie Scholarship Program. Through this initiative, Axie owners are able to sponsor players who lack the funds necessary to form their own starter team. In so doing, sponsors lend their Axies for use by their sponsored parties and in turn receive a share of the $SLP they earn. At scale, this stream of passive income can far exceed the earnings of users who choose to play the game independently.
A discussion of Axie Infinity’s pricing mechanics should naturally begin with the in-game currency, Smooth Love Potion ($SLP). At a high-level, players can earn $SLP by competing in and winning matches, and can then use their earnings to breed new Axies. Given that $SLP is the primary medium by which players can benefit from the game’s P2E model, it is critical for there to be measures in place to mitigate debasement of its value and curb inflation in the virtual economy. Importantly, there are two mechanisms which combine to regulate the circulating supply of $SLP as well as its price:
It should be noted that recent changes to the fee models have raised the overall cost for equivalent levels of breeding. Where the original cost was comprised only of the gas fees paid on the Ethereum blockchain, a recent migration of activities to the Ronin sidechain has exchanged these gas costs for a fee denominated in the game’s governance token $AXS. The net effect of this change in fee structure has been to raise the overall cost of reproduction.
Another facet to the pricing mechanisms in Axie Infinity concerns the inflation rate of the actual Axie population. As previously mentioned, joining the game entails the purchase of 3 Axies with ether, which in turn must be purchased with fiat; thus, it is important that the price of Axies is kept in check such that new users can continue to join and benefit from the P2E model. The key method of population management built into the game is providing existing players with opportunities for vertical rather than horizontal progression. In essence, this means incentivizing players to upgrade a narrow set of Axies rather than expanding their collection. To achieve this, an upgrade system is in place which acts as a supply sink for Axies, maintaining their long-term population growth at a targeted inflation rate and keeping their prices at a reasonable level. That said, the short-run price of Axies can vary dramatically, recently rising from $250 to roughly $450 over 6 days. This increases the short-term cost of admission into the market, and is attributable to rising demand generated by new players as well as the rising price of $SLP.
These supply-side mechanics are especially critical as the demand for Axies skyrockets. Although the game was initially released in 2018, its popularity in terms of volume of new players as well as daily active users has only recently seen a spike. In part, this rise in demand is driven by the recent media focus surrounding NFTs and the attractive financial opportunities of P2E games. Crucially, such demand can only be sustained if the game is continuously developed until it eventually rivals the mainstream F2P behemoths of the modern age. As new players enter the market out of sheer curiosity or economic desperation, and existing players continue breeding Axies to capitalize on their earning potential, the demand for Axies grows. To ensure the viability of the player-owned economy, this rise in demand must be met with the supply-side mechanics detailed above.
While the promise of P2E games is undeniable, and Axie Infinity provides a poignant case study of just how impactful this model can be, there will undoubtedly be some time before P2E can displace F2P as the dominant gaming model. As is the case for most blockchain-based or crypto-related applications, the onboarding processes for these P2E games remain convoluted and the technical barriers to entry have proven far too high to achieve a true critical mass. Ultimately, it is hoped that these issues can be overcome given the sheer potential of P2E gaming to combat rampant and widespread poverty. In much the same way that crypto-evangelists have claimed bitcoin and its successor currencies can bank the unbanked, it can be said that the combination of NFTs and the P2E gaming model can help provide for those not provided for by their governments.
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