In the "Axie Infinity drives the NFT sector to rise against the trend | Foresight Ventures Weekly Brief" released on July 5th, we mentioned that Axie's NFT sales soared. The continued downturn in July produced some "DeFi Summer" flavors.
We expounded the "Play to Earn" model, the rationale for its existence, and the brand-new industries it brings, and its model has been established for a long time. What P2E games even subvert is not the traditional game industry, but the occupations that low-income groups such as Uber drivers are mainly engaged in.
Finally, through the analysis of the actual data of Axie Infinity, we believe that even if the current currency price is overheated, its business fundamentals are still very strong, and in the long run, it will disrupt the crypto ecosystem including DeFi mining.
What is "Play-to-Earn"?
The business model of Plan to earn has a long history in traditional games. In games such as World of Warcraft and Onmyoji, a group of players make money by selling equipment or equipment. In blockchain games, this model has been upgraded, and players can earn real money by playing games with cryptocurrency-based assets (NFTs). By actively participating in these virtual economies, players can earn rewards such as in-game assets and tokens, which can then be traded or sold on the open market.
This is an important shift in the game world, because traditionally, in-game asset transactions are only in the game ecosystem, and it is difficult for players to trade or sell their digital assets outside the platform.
In developing countries, most people have limited sources of income, but now they can earn more income through digital devices and the Internet. Filipino players of the blockchain game Axie Infinity can earn $500 a month in the game, which is 2-3 times the local minimum wage.
From Free-to-play to Play-to-Earn
At the very beginning, players had to pay to purchase game licenses. After entering the Internet age, the free-to-play game model gradually developed. The so-called free-to-play game means that players can obtain basic game experience at zero cost, while obtaining advanced game experience or personalized items requires Pay extra. Most of the highest-grossing games in the world right now are these so-called free-to-play games. In June 2021, Tencent's "Honor of Kings" mobile game attracted nearly 277 million US dollars (approximately RMB 1.79 billion) in the global App Store and Google Play, a year-on-year increase of 21% in June 2020. These free-to-play games are already raking in billions of dollars a year, which just goes to show that the free-to-play business model has matured and developers have learned the art of free-to-play monetization.
Source: sensortower.com
blockchain gameblockchain gameVery well matched.
In fact, P2E games are not necessarily free games. Taking Axie Infinity as an example, players need to purchase at least 3 Axies to start the game, which may cost hundreds of dollars at present. We think this is reasonable. First, the matching of input and output is a long-term healthy economic model; second, game development requires costs. It is also acceptable for players to pay some start-up costs, since players can ultimately gain value by selling crypto assets. On the contrary, if this game is completely free-for-all, we believe that such an economic model is unsustainable.
P2E inspires a whole new industry
The P2E model powered by blockchain technology is opening up digitally native economic opportunities to entirely new segments of the population. Playing games is no longer just a consumer behavior to pass time. By playing games day after day, players are more like working, giving time and labor, and earning income for their families. Axie Infinity is a great example. Crucially, especially during the COVID-19 pandemic, poorer groups who need supplementary income tend to benefit the most. Since part of the mission of cryptocurrency from the beginning has been financial inclusion and the open source of the digital economy, it is critical to bring those who need it most in it — and P2E 2.0 is finally making it happen. Axie's economic model illuminates how the concept of cryptocurrencies, from provable scarcity to monetary policy, applies in the context of playing the game and earning it.
The P2E business model has also inspired ecological organizations such as game developers, players, and guilds.
Some very powerful guilds have been born in P2E games, and these guilds will occupy a pivotal position in the future game industry. Take Yield Guild Games (YGG) in Southeast Asia as an example. They have four main goals:
Invest in NFTs that generate the best returns in the Metaverse;
Build a global economy of gamers;
Generate income by operating and leasing NFTs;
Encourage community participation in guilds.
YGG has set up a scholarship program (scholarships), which designs a guild-community manager-scholar structure, and the guild is responsible for cultivating and leasing NFTs in the game, lowering the barriers for players to enter the game. The Community Manager is responsible for recruiting, training and mentoring new players, which is the key to Yield Guild's replication, expansion and success in Southeast Asia.
Through the community manager, the Yield Guild does not need to directly manage any scholars, but only needs to find a suitable community manager to cooperate. Scholars' income is shared, and scholars can only get 70% of the game revenue in the end, while the guild gets 10%, and the community manager gets 20%.
This is actually a very traditional business model. The capitalists provide the means of production to the proletarians, the proletarians earn labor income, and the capitalists obtain the value of surplus labor. As long as the economic ecology of the game is large enough, the guild will gain a very large economic value.
Amy Wu said that P2E has created Guild 2.0, which is an income-generating organization that buys, nurtures, leases assets, and provides employment opportunities in addition to communities. They can solve the cold start challenges of new Nft games and also become dominant buyers of new assets (eg Axies). Most of Axie Infinity's 500,000 DAUs are scholarship earners. For these players, their substitutes are not games like Fortnite, and Axie replaces the jobs of Uber or Grab.
Is Play-to-Earn a false proposition
In fact, when I first came into contact with the Axie Infinity mode, I first thought of Qutoutiao. As one of the three giants in China’s sinking market, Qutoutiao actually adopted the “read to earn” subsidy model. Users of Qutoutiao can get cash rewards by registering, reading, sharing, and attracting new users. This model once brought Qutoutiao a high-speed user growth, making Qutoutiao listed on Nasdaq in just two years. But judging from the stock price and financial data of Qutoutiao, this model can almost be said to have failed. The stock price of Qutoutiao has fallen from the highest point of 18 US dollars to less than 2 US dollars at present.
The main criticism of Qutoutiao is that its low-quality user group is difficult to attract high-quality advertisers. Almost all of its users are wool party members, who have lower requirements for news content, resulting in the platform being flooded with spam. Moreover, such users are not loyal to the platform, and it is difficult to achieve the conversion goal of advertisements. Therefore, it is difficult for the news business to form a healthy income and expenditure balance.
At first glance, the P2E model is very similar to that of Qutoutiao, but we believe that the P2E model can be established. It is the advertisers who pay for the users of Qutoutiao, but due to the low conversion rate, advertisers are not very motivated to pay. In P2E, the economic model is endogenous, and what players essentially share is the benefits of the game's ecological growth. With more and more game players, the demand for encrypted assets in the game is increasing. Players sell assets to each other, forming a prototype of a metaverse economy. In this world, there are farmers, merchants, and consumers. The key is that the interests and goals of these players are close, unlike the relationship between users and advertisers in Qutoutiao who extract value from each other.
Why do we say that Play-to-Earn is the next Liquidity Mining?
The "DeFi summer" in 2020 ignited the DeFi industry, and the amount of locked positions in DeFi increased by more than 100 times in one year. Currently, UNI, LINK, and AAVE have entered the top 30 in the cryptocurrency market value list. The development of DeFi is absolutely inseparable from the creation of Liquidity Mining. It can be said that Liquidity Mining is the biggest contributor to the protection of the DeFi industry.
In the early days of Liquidity Mining’s launch, we could hear a lot of doubts, because it was very similar to the previous ICO. At first, users provided their own ETH and stable coins to get platform currency rewards. This was regarded by doubters as a new Ponzi scheme and bubble . But a year later, Liquidity Mining's model has been proven by the market. The main reason for the success is that these DeFi protocols have actually created value, and the revenue of Liquidity Provider is actually a share of the protocol's growth revenue.
As mentioned earlier, the P2E model is also for players to share the benefits of the growth of the game ecology. As long as the game ecology continues to grow, this set of economic flywheels can continue to rotate, even if there are bubbles such as over-issued assets and falling prices in the process. , we believe that the model itself holds.
In terms of market participation roles, the participants of Liquidity Mining are "institution-user-mining, selling and extracting farmers", and the participants of P2E are "guild-player-wool party". The circular logic of the entire economy is consistent.
Optimistically speaking, the P2E market is much larger than that of Liquidity Mining. In terms of income, on July 16, Axie Infinity's single-day income was US$8.8 million, and the average daily income of King of Glory in June was US$9.2 million.
Source: tokenterminal.com
In terms of the number of users, the DAU of Axie Infinity has exceeded 500,000, while the total number of users of the top ten DEX protocols in 24 hours on July 17 was less than 300,000. It is shocking that the DAU of Axie Infinity has exceeded 500,000 in three months. There were less than 30,000 people before. At the same time, most players of Axie Infinity did not understand blockchain technology before, and even do not understand blockchain until now. Compared with DeFi, blockchain games have a very low barrier to entry, especially after opening the fiat currency deposit channel and using low-cost side chains, the game experience is almost the same as traditional Internet games. This is why Axie Infinity's player growth is so fast. It is also foreseeable that blockchain games will go out of the circle at a faster rate and gain a larger user base than DeFi. This is a bigger market than DeFi.
Source: debank.com
NFT Play a Core Role
NFT plays a vital role in the economic ecology of a game, and NTF affects the gameplay and revenue of the game. They all employ different classes of rarity, guaranteeing a limited supply of certain rare NFTs, rather than a disorderly growth of NFTs (hyperinflation) as the game progresses. The growth rate algorithm of NFT was pioneered by Crypto Kitties and developed more maturely in Axie Infinity and Zed Run.
Games make NFT generate income
Players can earn benefits from battles in Axie Infinity and racing cars in Zed Run, which are generated through interactions with NFTs. These NFTs that can generate cash flow can be used for lease or loan, just as YGG is doing. Compared with NFTs of art and collectibles, games create usage scenarios and utility for NFTs, increasing the fundamental value (use value) of NFTs.
Source: outlier ventures
The use of NFT is more important to make virtual items truly property. The ownership of items in centralized games is actually controlled by the platform, while in blockchain games, due to the transparency and unmodifiability of smart contracts, players hold the ownership of encrypted assets, and you use the assets you own to multiply the assets Also belongs to you.
... the democratization of property, not by abolishing it, but by popularizing it so that every citizen without exception can become an owner is much easier than one might imagine: in two words, learn To create wealth and learn to distribute wealth, you should combine material grandeur with moral grandeur.
——Victor Hugo, Les Misérables, 1862
Let's take Axie Infinity as an example to actually analyze its current performance as the first popular P2E blockchain game.
Entry costs are rising
Axie Infinity marketplace is the main channel for players to purchase Axies. The game mechanism is designed to buy three Axies to form a team to participate in the game and start making money.
The current market price changes very fast. The price of Axies around July 8 is around $250, about $350 on July 12, and basically rises to $450 on July 14. According to the sharp increase in the number of players and the impact of the rise in SLP , Axies payback period will decrease rapidly, which in turn will affect the price of Axies. The current cost of admission is about $1300.
Source: Axie Infinity
Rising cost of reproduction
It was observed that the single-day trading volume of Axies began to skyrocket around May 1 this year. This is because around April 28th, the platform officially completed the technical upgrade, and the game was migrated from ETH to the self-developed side chain Ronin as a whole (through this change, no additional gas fee is required to play the game, and any income is It can be realized within seconds).
Total reproduction cost = fixed cost (not related to the number of reproductions, pay ETH or AXS) + variable cost (related to the number of reproductions, pay SLP)
From April to now, the fixed reproductive cost has gone through three stages.
The first stage: April Axie Infinity runs on the ETH network, only need to pay GAS fee, not AXS.
Based on the ETH price and gas fee at the end of April, the gas fee cost for breeding is:
2500*0.005=12.5 USD
The second stage: After transferring to the Ronin chain in early May, no GAS fee is required, but 2 AXS is required:
10*2=20 USD
The third stage: At the beginning of July, the breeding fee was changed to 4AXS, and the price of AXS increased:
20*4=80 USD
From the perspective of players, the migration of the ETH main chain to the Ronin chain has not actually reduced the cost of reproduction. On the contrary, with the increase in the price of AXS, the cost of reproduction has been further pushed up. However, with the increase in the price of Axies, the cost of reproduction has increased. The proportion is gradually shrinking.
In the game, depending on the number of reproductions, the amount of SLP paid is different. Based on the SLP price of 0.3 USD, the SLP cost for each reproduction ranges from 30-510 USD.
Source: Axie Infinity
Returns remain extremely high
There are three sources of in-game revenue, among which daily earning of SLP (little love potion) and Axies breeding and selling are the main sources of income, and the other is earning AXS tokens (platform governance tokens) through monthly qualifying .
The daily task is fixed to reward 50 SLP, and the daily battle is based on a 50% winning rate, and you can get 80 SLP. In addition, you can get up to 100 SLP every day through the story mode. If you are familiar with pets and skills, you can play 2 games a day. About an hour, if it is slower, it may take three hours, and you can get about 130-230 SLP (floating).
A season system has been established. Through one season per month, AXS is awarded as season rewards to encourage players to invest more. The corresponding game rewards are (1000 WAXS=1AXS):
Source: Axie Infinity
A total of 9,350 AXS are issued each season, equivalent to $187,000. Since only the top 300 in the season can get AXS, most players cannot get this part of the income.
Source: Axie Infinity
According to the transaction behavior analysis of Axies in the marketplace, most players breed for sale, and because the breeding cost of Axies above 4 is high, the number of sale is small. So we can speculate that most players choose to breed no more than 4 times. So let's say the player chooses to breed every 5 days and stop breeding after 3 times. Afterwards, only obtain SLP income through battles and missions, and the daily SLP is assumed to be 150. And use this to calculate the player's rate of return.
Source: Delphi Digital, Axie Infinity
Breeding first income: 450-100*0.3-4*20=$340
The second income of breeding: 450-200*0.3-4*20=310 USD
The third income of breeding: 450-300*0.3-4*20=280 USD
SLP income within 15 days: 150*15*0.3=675 USD
The accumulative income obtained within 15 days was USD 1605, basically exceeding the input cost.
After 15 days, it will no longer reproduce by default, and only generate income through SLP.
Combining Axies sale and SLP income, the annualized income can be obtained:
（（（340+310+280）+（365-15）*150*0.3)/1400-1） 100%=1091%
The rate of return will fluctuate significantly with the price fluctuations of SLP and Axies. However, according to the current annualized rate of return of 11 times, both physical mining machine mining and DeFi liquidity mining are significantly attractive. Therefore, we believe that the Play to Earn model will attract some of the original mining funds.
Vault economy (the way to protect the price of AXS)
4.25% of the market transaction volume and all breeding costs will be included in the community treasury and shared by those who hold AXS.
Source: Axie World
According to the current incremental speed of the community treasury, those who hold AXS in the future will have the right to allocate a huge amount of funds. In addition, more AXS will be deposited after the Staking incentives take effect, which will effectively support the price of AXS, even in the future When DAU reaches a certain bottleneck, SLP will be overissued, and AXS will also get a certain buffer space.
Land Economy (Future Development Potential of the Game)
In addition to Axies, the game also owns another land NFT, a total of 90,601, which is the same as Axies. Players can directly trade with ETH in the Marketplace, and land owners can also obtain rewards that exist in the plot, such as the AXS token In addition, in the future, players can use the SDK (map editor) to build their own homes on the land they own, and can also purchase material upgrades or decorations in the MarketPlace. This is how Axie Infinty has the opportunity to become a metaverse in the future.
Source: Axie Infinity
Is Axies Oversupplied?
The supply and demand relationship of Axies is highly related to the robustness of the entire game economic system. If Axies reproduce excessively and no new players buy it, it will lead to a drop in the price of Axies, which in turn will affect the demand for SLP and AXS. Due to the unlimited issuance of SLP, and the lack of corresponding Deflation mechanism, SLP will be severely inflated, which will eventually cause the collapse of SLP prices.
Since each player holds three Axies and can play the game, it is more appropriate to consider that the overall ratio of Axies to DAU should be between 4 and 5. The data of the past two weeks will be reviewed below.
Source: twitter.com/Maxbrand99
We take the average value of the data in the past two weeks to calculate the growth of Axies in the future. The number of Axies on June 28 was 1.15 million, and it was 1.5 million by July 5, with a growth rate of 30.4%; by July 12 it was 1.96 million , the growth rate is 30.6%; we take 30.5% as the recent growth rate, then the number of Axies on July 19 (one week later) is about 2.55 million, and the number of Axies on July 26 (two weeks later) is about 3.338 million.
Source: twitter.com/Delphi_Digital
According to the DAU data performance, we can conclude that the DAU on June 28 was 250,000, and the DAU on July 5 was 350,000, with a growth rate of 40%; the DAU on July 12 was 500,000, with a growth rate of 42.8%; we take 41% is the recent growth rate, so the DAU on July 19 (one week later) was about 705,000, and the DAU on July 26 was about 994,000.
From the above data we can conclude:
If the recent increase in the number of Axies and the increase in DAU is maintained, the ratio of Axies to DAU will continue to decrease in the future, resulting in a further increase in the price of Axies, forming a positive cycle with the price of AXS and SLP, and further drive up the overall price. Judging from the current data, the supply and demand relationship of Axies is still relatively healthy.
However, we believe that with the gradual increase in the entry threshold, it is difficult for the growth of DAU to maintain such a high growth rate all the time, and players will look for games of the same type but with a lower threshold. These factors will inhibit the growth rate of DAU, but the reproduction of Axies will maintain a certain inertia, and will continue to maintain exponential growth, eventually leading to oversupply. In order to maintain the stability of the Axies economic system, the development team needs to continue to grow users, create new demands, and maintain the absorptive capacity of the economic system.
Competitive Analysis:
According to Buffett's moat theory, the moat of an enterprise mainly comes from four aspects, we: intangible assets (brand, patent, team), network effect, switching cost (after users use it, the cost of changing products is very high) and cost advantage .
Brand: Axie Infinity is a phenomenon-level product, including its investors Animoca and guild YGG, which have formed certain brands among competitors.
Team: The playability of the game, the design of the economic model, and the operational capabilities reflect the strong strength of the team.
Network Effect: Axie Infinity already has 500,000 DAU, and thanks to the help of the guild, it maintains a very strong momentum of spread. The three-layer structure of "guild-manager-player" adopted by the guild has the potential for viral expansion and helps to enhance the network effect.
Switching cost: The switching cost of traditional online games is relatively low. Considering that Axies has a certain developmental attribute, players may develop certain feelings for Axies, so switching needs to pay a certain emotional cost. The guild is a double-edged sword. The guild has a very strong social attribute, and the switching cost of the social network is the highest. If you rely too much on the guild to bring new players, then when the guild itself migrates to other games, it will face a relatively difficult situation. Strong churn pressure. Axie Infinity can also increase the player's switching cost through the expansion of the economic system.
Industry concentration:
According to traditional industries, we predict the concentration: DEX>LEND>Games. The game industry will form an industry pattern in which many projects coexist.
Summary: Can the Play-to-Earn flywheel keep spinning
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