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This report was written in October 2021 and is meant for educational purposes only. It is not meant to as financial advice. Crypto assets are risky, be careful.
Axie Infinity is a digital pet collecting, and battling game built by Sky Mavis, a Vietnamese company, on the Ronin blockchain. Its novel play-to-earn (P2E) gaming model has been credited for its growth and success, both in the number of players and token price. The gameplay for Axie Infinity is similar to a turn-based card game, where a player competes with their pet Axies in a team of three to defeat the other team using skill cards.
Figure 1: AXS price has increased with growth in daily active users
The Axie Infinity ecosystem has four major components that align the incentives for growth and sustainability –
Axie NFTs are the digital pets build on the ERC-721 token standard, that are the central piece in gameplay. Unlike a traditional game where a player has to buy a license or subscription from the developers, the entry price to play Axie Infinity is having ownership of three Axie NFTs. Axie NFTs can be acquired from other players through the marketplace. Growth in player base and new use-cases for Axies drives the demand. Supply is uncapped and increases through an in-game feature called “breeding”. Breeding allows players to create new Axies by combining two Axies, 1 AXS and some SLP, to create a new Axie. To limit Axie inflation, the amount of SLP required to breed an Axie increases every time it is bred and the same Axie can be bred a maximum of 7 times. Currently, the cheapest Axie is available for ~0.05 ETH (~180 USD), making the entry price for the game ~0.15 ETH (~540 USD). There are currently ~2 mn Axie holders with ~7.5 mn Axies.
AXS is the governance token for the platform. AXS holders have ownership of the platform with a share in revenue and voting rights. Beyond ownership and fee share, demand for the token comes from breeding. 1 AXS is transferred to the community treasury for every Axie bred. The total supply of AXS is capped at 270 mn tokens with a 65-month unlock schedule, as shown in figure 2. The founding team will receive 21% of AXS as compensation for developing core game mechanics. 57% of AXS supply (play to earn, staking rewards, and ecosystem funds) is earmarked to grow the platform sustainably.
Figure 2: Token Unlock Schedule for AXS
Smooth love potions are in-game tokens that provide no governance rights. Players can earn SLP by playing the game and completing daily tasks to earn a maximum of 75 SLP per account per day. Unlike AXS that are transferred to the community treasury, SLP used in the breeding process are burnt. The excess of SLP minted over SLP burnt provides an estimate for the outflow for incentivising players to play the game. As per estimates, there are 8.2 bn excess SLP tokens, of which 3.5 bn were generated in September. This translates to a monthly expenditure of USD 280 mn at USD 0.08 per SLP for September.
Figure 3: Cumulative excess SLP are ballooning as new supply outpaces demand
Land is the final major piece in the Axie ecosystem. Land parcels do not currently have a use but will later be used to farm resources and create a platform ecosystem within the Axie universe. In the second half of 2022, the Lunacia SDK is expected to go live, enabling owners to build games and experiences on the Land they own. This will allow Axie Infinity to grow from a simple game and become a Web 3 platform with community owned and generated content. There are a total of 90,601 Land parcels, of which players own 17,241.
Axie Infinity earns revenues through two sources – marketplace fee and breeding fee. 4.5% of all transactions on the marketplace go to the Axie treasury. This includes all sales of Axie NFTs, Land, and other NFTs. The other source of income is the breeding fee, where 1 AXS is transferred to the community treasury for every Axie bred. Fee revenue have seen significant growth in the past few months as user activity on the platform has exploded. The community treasury currently has USD 2.4 bn in assets in AXS and Wrapped Ether.
Figure 4: Growth in fee revenue exploded in July and August but has tempered in September and October
The flywheel of Axie Infinity’s tokenomics spins when new users join, increasing the demand for Axie NFTs, leading to higher consumption of AXS and SLP. Users will only continue to grow if they either like the game or want to earn money through SLP farming. Therefore, to drive user growth, the game must first be fun in its gameplay, story, mechanics, and art. It is hard to rate this objectively, but in our opinion, Axie Infinity is a simple game with no novel game mechanics or exciting elements to sustain player interest. While the number of daily active users is impressive, those numbers may be inflated with users having multiple accounts to efficiently farm SLP. We compared the number of viewers on Twitch for Axie Infinity versus other popular games to gauge genuine interest in the gameplay. We found that there were very few viewers for Axie Infinity.
Table 1: The number of Twitch viewers for Axie Infinity is significantly lower than other popular games
The other way to generate new users is through the play-to-earn component of the game. This model is only sustainable if the money that enters the ecosystem is greater than the money that leaves it. The current increase in users set off a chain reaction through an increase in Axie demand leading to a rise in AXS and SLP demand. However, this is already cooling off, and cracks in the system are being exposed. In September 2021, to combat overinflation, the maximum number of SLP that can be earned daily was halved from 150 to 75 and the SLP cost for breeding increased. Play-to-earn players are a cost centre for the ecosystem, and the tokens they sell must be offset in new purchases from paying users for the model to be sustainable.
Figure 5: The Axie Infinity ecosystem will grow if more money enters the ecosystem than exits it
Further, it must also be noted that play-to-earn users are difficult to monetise in any way, including advertising, as they would typically be low income from developing parts of the world. They are also unlikely to be “sticky” or loyal users and, if incentivised by other games and platforms, are likely to switch. Other blockchain games are already being developed that have significant interest, like Illuvium, Star Atlas, and Dark Forest.
As a platform, the Land game system is not yet built out and therefore, it is hard to gauge how successful it will be. At its base, it seems similar to other metaverses like Decentraland or Treeverse. It is unclear why a game developer will build on Land and share revenue with Axie Infinity rather than launch their own game and platform. The space is likely to be crowded, with even non-blockchain companies like Facebook and Epic Games planning to build their metaverses.
Table 2: Valuation table for AXS
AXS trades at USD 126.61 at the time of writing with a total supply of 270 mn, its fully diluted market cap is USD 34.2 bn. Adjusting the market cap for unissued tokens retained to fund the ecosystem, viz. play to earn (20%), staking rewards (29%) and ecosystem fund (8%), the adjusted market cap is calculated as USD 14.7 bn. With the last 12-month fees of USD 799 mn, the token trades at a trailing price-to-sales ratio of 18. If fees earned in September of USD 220 mn are extrapolated to 12 months, Axie Infinity will earn USD 2.6 bn in the next 12 months, bringing the forward price-to-sales ratio to 5.6.
Epic Games, developers of the game Fortnite, had expected revenues of USD 3.6 bn for 2020. It recently raised USD 1 bn at a valuation of USD 28.7 bn, at a trailing price-to-sales ratio of 8. However, a lower multiple for Epic Games is justified as its revenues have been dropping as Fortnite is slowly losing popularity to newer games.
Strictly comparing the price-to-sales valuation with Epic Games, Axie Infinity does not seem overvalued, especially if adjusting for growth. However, it must be noted that Fortnite has a significantly larger user base of 60 mn monthly active users and a payer base of 11 mn. As seen from the declining trend in Fortnite players, even superhit games cannot sustain player interest for a long duration. As such, with an outdated game design, a difficult to monetise user base, and increasing competition, it is unlikely that Axie Infinity will be able to retain its users over a long time. We value AXS at a forward price-to-sales ratio of 2, giving it a SELL rating with a target price of USD 40-50. We think a game like Axie Infinity is unlikely to retain its users for more than one year. With a consistently declining user base, it is unlikely to generate the same revenue over a long period.
Sky Mavis recently raised funding of USD 152 mn from a star list of investors, including a16z, Paradigm, Accel, and FTX. If it can effectively utilise the funds and expertise of its investors to improve the in-game mechanics and continue to grow the user base, it may do well. The platform feature of Land may also provide a significant upside if it sees considerable adoption at launch. Further, the Ronin blockchain that Axie Infinity runs on, may be rented out to other blockchain games in the future to create another revenue stream for the platform.
This report was written in October 2021 and is meant for educational purposes only. It is not meant to as financial advice. Crypto assets are risky, be careful.
Axie Infinity is a digital pet collecting, and battling game built by Sky Mavis, a Vietnamese company, on the Ronin blockchain. Its novel play-to-earn (P2E) gaming model has been credited for its growth and success, both in the number of players and token price. The gameplay for Axie Infinity is similar to a turn-based card game, where a player competes with their pet Axies in a team of three to defeat the other team using skill cards.
Figure 1: AXS price has increased with growth in daily active users
The Axie Infinity ecosystem has four major components that align the incentives for growth and sustainability –
Axie NFTs are the digital pets build on the ERC-721 token standard, that are the central piece in gameplay. Unlike a traditional game where a player has to buy a license or subscription from the developers, the entry price to play Axie Infinity is having ownership of three Axie NFTs. Axie NFTs can be acquired from other players through the marketplace. Growth in player base and new use-cases for Axies drives the demand. Supply is uncapped and increases through an in-game feature called “breeding”. Breeding allows players to create new Axies by combining two Axies, 1 AXS and some SLP, to create a new Axie. To limit Axie inflation, the amount of SLP required to breed an Axie increases every time it is bred and the same Axie can be bred a maximum of 7 times. Currently, the cheapest Axie is available for ~0.05 ETH (~180 USD), making the entry price for the game ~0.15 ETH (~540 USD). There are currently ~2 mn Axie holders with ~7.5 mn Axies.
AXS is the governance token for the platform. AXS holders have ownership of the platform with a share in revenue and voting rights. Beyond ownership and fee share, demand for the token comes from breeding. 1 AXS is transferred to the community treasury for every Axie bred. The total supply of AXS is capped at 270 mn tokens with a 65-month unlock schedule, as shown in figure 2. The founding team will receive 21% of AXS as compensation for developing core game mechanics. 57% of AXS supply (play to earn, staking rewards, and ecosystem funds) is earmarked to grow the platform sustainably.
Figure 2: Token Unlock Schedule for AXS
Smooth love potions are in-game tokens that provide no governance rights. Players can earn SLP by playing the game and completing daily tasks to earn a maximum of 75 SLP per account per day. Unlike AXS that are transferred to the community treasury, SLP used in the breeding process are burnt. The excess of SLP minted over SLP burnt provides an estimate for the outflow for incentivising players to play the game. As per estimates, there are 8.2 bn excess SLP tokens, of which 3.5 bn were generated in September. This translates to a monthly expenditure of USD 280 mn at USD 0.08 per SLP for September.
Figure 3: Cumulative excess SLP are ballooning as new supply outpaces demand
Land is the final major piece in the Axie ecosystem. Land parcels do not currently have a use but will later be used to farm resources and create a platform ecosystem within the Axie universe. In the second half of 2022, the Lunacia SDK is expected to go live, enabling owners to build games and experiences on the Land they own. This will allow Axie Infinity to grow from a simple game and become a Web 3 platform with community owned and generated content. There are a total of 90,601 Land parcels, of which players own 17,241.
Axie Infinity earns revenues through two sources – marketplace fee and breeding fee. 4.5% of all transactions on the marketplace go to the Axie treasury. This includes all sales of Axie NFTs, Land, and other NFTs. The other source of income is the breeding fee, where 1 AXS is transferred to the community treasury for every Axie bred. Fee revenue have seen significant growth in the past few months as user activity on the platform has exploded. The community treasury currently has USD 2.4 bn in assets in AXS and Wrapped Ether.
Figure 4: Growth in fee revenue exploded in July and August but has tempered in September and October
The flywheel of Axie Infinity’s tokenomics spins when new users join, increasing the demand for Axie NFTs, leading to higher consumption of AXS and SLP. Users will only continue to grow if they either like the game or want to earn money through SLP farming. Therefore, to drive user growth, the game must first be fun in its gameplay, story, mechanics, and art. It is hard to rate this objectively, but in our opinion, Axie Infinity is a simple game with no novel game mechanics or exciting elements to sustain player interest. While the number of daily active users is impressive, those numbers may be inflated with users having multiple accounts to efficiently farm SLP. We compared the number of viewers on Twitch for Axie Infinity versus other popular games to gauge genuine interest in the gameplay. We found that there were very few viewers for Axie Infinity.
Table 1: The number of Twitch viewers for Axie Infinity is significantly lower than other popular games
The other way to generate new users is through the play-to-earn component of the game. This model is only sustainable if the money that enters the ecosystem is greater than the money that leaves it. The current increase in users set off a chain reaction through an increase in Axie demand leading to a rise in AXS and SLP demand. However, this is already cooling off, and cracks in the system are being exposed. In September 2021, to combat overinflation, the maximum number of SLP that can be earned daily was halved from 150 to 75 and the SLP cost for breeding increased. Play-to-earn players are a cost centre for the ecosystem, and the tokens they sell must be offset in new purchases from paying users for the model to be sustainable.
Figure 5: The Axie Infinity ecosystem will grow if more money enters the ecosystem than exits it
Further, it must also be noted that play-to-earn users are difficult to monetise in any way, including advertising, as they would typically be low income from developing parts of the world. They are also unlikely to be “sticky” or loyal users and, if incentivised by other games and platforms, are likely to switch. Other blockchain games are already being developed that have significant interest, like Illuvium, Star Atlas, and Dark Forest.
As a platform, the Land game system is not yet built out and therefore, it is hard to gauge how successful it will be. At its base, it seems similar to other metaverses like Decentraland or Treeverse. It is unclear why a game developer will build on Land and share revenue with Axie Infinity rather than launch their own game and platform. The space is likely to be crowded, with even non-blockchain companies like Facebook and Epic Games planning to build their metaverses.
Table 2: Valuation table for AXS
AXS trades at USD 126.61 at the time of writing with a total supply of 270 mn, its fully diluted market cap is USD 34.2 bn. Adjusting the market cap for unissued tokens retained to fund the ecosystem, viz. play to earn (20%), staking rewards (29%) and ecosystem fund (8%), the adjusted market cap is calculated as USD 14.7 bn. With the last 12-month fees of USD 799 mn, the token trades at a trailing price-to-sales ratio of 18. If fees earned in September of USD 220 mn are extrapolated to 12 months, Axie Infinity will earn USD 2.6 bn in the next 12 months, bringing the forward price-to-sales ratio to 5.6.
Epic Games, developers of the game Fortnite, had expected revenues of USD 3.6 bn for 2020. It recently raised USD 1 bn at a valuation of USD 28.7 bn, at a trailing price-to-sales ratio of 8. However, a lower multiple for Epic Games is justified as its revenues have been dropping as Fortnite is slowly losing popularity to newer games.
Strictly comparing the price-to-sales valuation with Epic Games, Axie Infinity does not seem overvalued, especially if adjusting for growth. However, it must be noted that Fortnite has a significantly larger user base of 60 mn monthly active users and a payer base of 11 mn. As seen from the declining trend in Fortnite players, even superhit games cannot sustain player interest for a long duration. As such, with an outdated game design, a difficult to monetise user base, and increasing competition, it is unlikely that Axie Infinity will be able to retain its users over a long time. We value AXS at a forward price-to-sales ratio of 2, giving it a SELL rating with a target price of USD 40-50. We think a game like Axie Infinity is unlikely to retain its users for more than one year. With a consistently declining user base, it is unlikely to generate the same revenue over a long period.
Sky Mavis recently raised funding of USD 152 mn from a star list of investors, including a16z, Paradigm, Accel, and FTX. If it can effectively utilise the funds and expertise of its investors to improve the in-game mechanics and continue to grow the user base, it may do well. The platform feature of Land may also provide a significant upside if it sees considerable adoption at launch. Further, the Ronin blockchain that Axie Infinity runs on, may be rented out to other blockchain games in the future to create another revenue stream for the platform.
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