Play-to-Earn (P2E) captured huge attention in the crypto space in 2021 due to the sensational growth of Axie Infinity, a NFT-based blockchain game (see Figure-1). Unfortunately, as many had analyzed, Axie Infinity was not sustainable, leading to its collapse in early 2022. At one time, Axie Infinity enabled people in developing countries like the Philippines to earn additional income or even make a living, which was critical during the COVID-19 crisis. But in the end, It promised riches and delivered disaster.

From a tokenomics design point of view, P2E is an incentive program. Like other incentive designs, the effectiveness of P2E incentive design drove the rise of Axie Infinity, and unsustainability of the P2E program caused the fall of Axie Infinity. However, compared to other famous incentive programs such as “Yield Farming” introduced by Compound and “Trans-Fee Mining” pioneered by Fcoin, Axie Infinity has a few good tokenomics designs that are unique and can be refined. More importantly, if adapted and applied well in other products such as DeFi, they will drive another wave of innovation!

Lesson #1: native token demands

For a token-based incentive program like P2E to work, the token must maintain a market value. This is more important to P2E since people depend on exchanging earned tokens to fiat and pay their living expenses. To maintain a market value, there must be token demand and ideally token demand is roughly larger than or equal to token supply over time.

Token demand can either come from the secondary market or even better come from the product natively. It seems everyone intuitively knows how to give out tokens to incentivize certain actions to drive the growth. But most people don’t know how to design native token demands or don’t recognize the importance of native token demands. Yield farming via a governance token illustrates the awkward situation vividly — governance tokens are abundantly rewarded to incentivize liquidity inefficiently, while the native demand of these governance tokens is really weak, based on the low governance participation and the small usage of governance tokens in the protocols.

Axie Infinity created a strong native token demand for its SLP (Smooth Love Potion) ERC20 token, which are minted and issued to players as part of the P2E incentive program. The native token demand comes from the design that SLP tokens are required and are burned to breed new Axie. As an ERC721 NFT, Axie also has a strong native demand by design — each player needs to have 3 Axie to play the game. The native SLP demand is very strong and during the high growth period, the demand (burned) is much higher than the supply (minted) as shown in the highlight area in Figure-2. Obviously there is a virtuous circle going up. P2E attracts more players to the game, more players drives the breeding of new Axie, which drives the demand of SLP tokens, and native SLP demand ensures a market value of SLP, which ensures the effectiveness of the P2E incentive program.

Lesson #2: a new growth engine

Token based incentive is a super effective growth hacking strategy, which only exists in web3 by the way. When a new type of incentive program is launched, the dramatic growth impact becomes obvious within weeks, like Yield Farming on Compound or Trans-Fee Mining on FCoin. P2E is different!

SLP was launched in December 2019, but the sensational growth of Axie Infinity did not come until April 2021, about 16 months later. So what is really the growth engine that drove the sensational growth of Axie Infinity in early 2021? The growth engine is the Axie Scholarship Program or Axie Lending Program.

The concept and practice of rewarding game-play with in-game currency that can be exchanged for real-word money is not new and it is called Gold Farming. By tokenizing in-game currency, P2E puts Gold Farming on steroids! But Axie Infinity is actually a pay-to-play game and players must have 3 Axies costing about $1000 in value to P2E. It is a significant barrier for most players who are from developing countries and limits the effectiveness of P2E as a growth hacking strategy.

Around the end of 2020, the Axie Scholarship Program started to pop up to eliminate the barrier for some new players to P2E. At a high-level, via these programs, Axie owners can lend their unused Axie to players and split the earned SLP typically 30–70.

In early 2021, the Axie Scholarship Program was industrialized via gaming guilds. These guilds invest capital (some of them raise external capital) to buy and breed Axies, and actively recruit players to P2E using their Axies. It is a lucrative business and during good times, initial investment can be returned in 5–7 days. The financial incentive is so strong that these guilds rushed to recruit as many new players as possible and propelled the sensational growth of Axie Infinity.

Lesson #3: monetary policy refinements

The monetary policy for the Axie Infinity economy can be changed on both the supply side and the demand side (even though monetary policy adjustments are manually done by the team, a centralized entity). When there was too much SLP supply in the market, the SLP rewards were cut by half. And when the market was down, the SLP burning tripled.

Most other token projects don’t have this flexibility built into their monetary policies. For example, bitcoin has a fixed token distribution schedule that can’t be changed. (Note: mining difficulty auto-adjustment might be argued as a monetary policy adjustment to ensure block rewards are released roughly every 10 minutes.) For another example, yield farming pioneer Compound initially had a fixed token distribution schedule. But only after a few months of launching the COMP token, the supply of COMP was changed via the governance in response to COMP selling pressure in the market.

Having a monetary policy that is tunable has a number of advantages because it can mitigate few flaws inherited in early stage projects.

• Forecasts of the growth of an economy will most likely be wrong. Hence the monetary policy decided based on the forecasts will most likely be wrong and should be refined based on real data of the economy accordingly.

• The digital asset prices in the market are absolutely unpredictable. Since higher or lower prices will affect the growth of an economy, adjusting monetary policy can affect the market prices and indirectly drive the growth of a healthy economy.

• Most projects in the beginning don’t have the domain expertises or could not recruit macro economists to properly set the monetary policy. Making monetary policy tunable opens the door for domain experts to come in later.

A sound monetary policy ensures a healthy economy which is critical to the success of a project in the long-term. Furthermore, monetary policy is a moat for the project since every economy, even the forked ones, is different and the same monetary policy won’t apply properly. Clearly whoever can manage the monetary policy well will have competitive advantages over competitors and win eventually.

Conclusion

Axie Infinity had sensational growth and put Play-To-Earn (P2E) in the spotlight. Even though Axie Infinity collapsed due to its unsustainable growth driver, there are 3 lessons we can learn from its tokenomics design. These lessons can be adapted and applied in products other than games such as DeFi, and fix their tokenomics design flaws. A new wave of innovation is coming to crypto! And coming to DeFi soon, watch Double.