NFT Roundup #16: How to prevent a collapse in demand for NFT game currencies
Buy the rumor, sell the news
This is a curated newsletter, covering news stories about NFTs. The NFT market is moving rapidly, and this is an attempt to provide some means of keeping up with its developments. Your curator is Dave Friedman.
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I’m doing something a bit different with today’s newsletter: I am exploring pay-to-earn games (like Axie Infinity) in order to better understand the risks to their token economies. When everything is up-and-to-the-right, it is useful to understand how it could quickly go down-and-to-the-right.
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Play-to-earn games like Axie Infinity have embraced the transactional promise of blockchains by allowing their players to earn virtual currency in exchange for time spent playing a video game. Players exchange their time for something of value. This is, of course, superficially similar to any standard job in which you are paid by your employer in exchange for your labor and time.
In the real world, this dynamic works out great because you receive cash to spend on food, rent, clothes, entertainment, etc. And if your employer goes bankrupt or you quit your job, you still have the cash your employer paid you (less taxes, obviously), which cash you can use to spend on whatever you want.
While play-to-earn looks similar, it differs in one significant way: the tokens you earn by playing the game are not (as of yet) spendable outside of the game. This presents a very interesting situation, in which the currency you earn has value only to the extent that other players demand it. In other words, if players get bored and stop playing the game, the underlying tokens will decline to zero.
Of course, as long as people demand the tokens, they can be sold for fiat. And fiat currency can, of course, be used outside of the game. Indeed, as Coinbase noted in a recent blog post, this is exactly what Axie Infinity players in developing countries do:
While the protocol revenue numbers alone depict the emergence of a new breakout crypto application, what’s more exciting is where Axie Infinity is taking off: in developing nations where players can often earn more playing the game and selling SLP for their native currencies than they can with a typical day job.
With an estimated 50% of daily active users (DAUs) coming from the Philippines, the game is also picking up steam in other emerging markets like Indonesia, Brazil, Venezuela, India, and Vietnam.
Created by game developer Sky Mavis in 2018, Axie started picking up organic traction in the Philippines in early 2020 after a few players realized they could make legitimate incomes by playing. When Covid lockdowns hit and many were put out of work, more were encouraged to give it a try. A documentary on the game’s growth called PLAY-TO-EARN went viral in May 2021 and DAUs went vertical soon after.
This is pretty cool! People in developing countries are looking for ways to earn an income, and along comes a game which allows you to earn a virtual currency in exchange for spending the time playing the game. And, even better, because demand for the virtual currency is high (because other people want to play the game and transact in its virtual world), you can sell that virtual currency for your country’s fiat currency, and then buy food, clothes, shelter, etc.
And, as long as people want to play the game, there will be a market for the virtual currency-to-fiat conversion.
But if people get bored with the game, then demand for the virtual currency will disappear, and, so, too, will the opportunity to convert the virtual currency to fiat. Players will be left holding a pile of worthless virtual currency that they can’t do anything with.
And therein lies the main risk with play-to-earn games. The game developer has to continuously improve the virtual world, expand its economy and functionality, and fend off competitors who want players to play their game.
And, all of this requires cash. Lots and lots of cash. All of which leads us to A16Z’s announcement of an investment in Mavis Sky, the company which makes Axie Infinity:
Axie Infinity’s Substack suggests that its developers think player community is key here. A robust community of players does two things: (1) it enhances the value that every additional player gets from playing the game, and (2) it creates a moat that makes it harder for other play-to-earn games to steal players. Here’s how they frame it:
Our Community is at The Center Of Everything We Do
Axie is the first game designed to be owned by the community that plays it. For far too long game publishers and app stores have held too much power and extracted too much value. The gaming industry needs to change and we will reconstruct it to share value with the most important members of any gaming community: the players.
We believe in:
Rewarding value creation: everyone’s time is valuable. People should always be rewarded for creating value, especially within games.
Co-creation: a game is a creative partnership between its developers and the community that plays and builds value around it.
Co-ownership: your game assets are your property. As a gamer, you deserve property rights and should be able to own the games you love.
That last bullet point, about property rights, is especially important. If you’ll excuse the brief segue, Peruvian economist Hernando de Soto argues that robust property rights in developing countries could unlock trillions of dollars of wealth for the world’s poor:
About two billion people have full rights to the property they live in and the land they farm, according to the director of the Lima-based Institute for Liberty and Democracy.
For the 5.3 billion who do not have such rights, the implications are stark: people are unable to leverage their resources to create wealth, and their assets become “dead capital” which cannot be used to generate income or growth.
As a result, the poor remain trapped by the “tragedy of the commons” where their unregistered assets can be stolen by powerful interests, hurting individuals and broader economic development, de Soto said.
So this is all pretty profound: Sky Mavis is pretty explicitly declaring its intent to devolve ownership of in-game assets to its players. The rubric they use, property rights, is indeed important, and could accrue significant value to the players. But more important for Sky Mavis (and its investors like A16Z) is that creating real, enduring value for its players ensures that its players have an incentive to stay in their virtual world, playing their virtual game. And, remember, the virtual currency that operates Axie Infinity’s virtual economy only has value to the extent that other players want to acquire it.
This is all very exciting, and portends real innovation in virtual real estate. I look forward to following its developments. Providing real property rights, albeit to virtual property, can unlock significant wealth for the world’s poor.