Play-to-Earn Gaming: Axie Infinity’s Pricing Mechanics
Aside from the seismic shifts that the blockchain is causing in the world of finance, it has recently begun to make an impact on the gaming industry as well. Most notably, the blockchain has given birth to a new business and monetization strategy for video games known as the play-to-earn model (P2E). To comprehend P2E as the next – and arguably the most economically robust – evolution in the gaming industry, it is necessary to consider both the gaming industry's past and its potential future.
As a result, the following topics will be covered in this article:
- Gaming Business Model Evolution
- A Quick Overview of the Play-to-Earn Model
- Axie Infinity and its Economy’s Pricing Mechanics
Gaming Business Model Evolution
The pay-to-play (P2P) model was the first approach to monetization in the gaming industry, dating back to arcade machines and the first home consoles. Simply put, this model provided gamers with complete and irreversible access to game content in exchange for a one-time payment. Variations of this model are still popular today. Many game developers, in particular, 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 discretion of the gamer.
The free-to-play (F2P) model is a more recent variation on the original P2P approach. Rather than requiring an upfront payment to gain access to a game's base content, the F2P model provides the gamer with full access to the base game at no cost. The developer's revenue is generated, however, through the recurring sale of in-game items. These items have become a staple of modern gaming, forming the monetization bedrock of popular titles such as Fortnite, League of Legends, and Clash Royale. They 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.
A Quick Overview of the Play-to-Earn Model
All of this culminates in the most recent evolution of gaming business models, as well as the primary focus of this article: play-to-earn. This model differs from previous models in that it focuses on making gamers the primary beneficiaries of a game's success. P2E games, like other types of games, reward users for their active participation in the community with in-game assets. P2E games differ from other models in that they create an active secondary market for these virtual assets, allowing users to exchange rewards earned while playing the game for cryptocurrency, which can then be converted into real-world fiat money.
It should be noted, however, that the P2E model is not a completely novel innovation. Long before the blockchain was used to power fully self-sustaining virtual economies, people living in the economic ruins of countries like Venezuela and China 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 always constitutes a violation of the terms of service for each game. Modern P2E blockchain games, on the other hand, are designed with the explicit goal of rewarding users in a tangible way, including assisting them in surviving the hardships of failed real-world economies.
When the two models are viewed through an economic lens, the fundamental difference between F2P and P2E games becomes immediately apparent. In the virtual economies of F2P titles, gamers can buy cosmetics and character upgrades but have no authority to resell them – effectively, the gamer does not have true ownership over what they purchased. If the individual becomes dissatisfied with an F2P game, they will be unable to recoup any of the time or money spent leveling and customizing their character. The costs of earning virtual goods in P2E games, on the other hand, are recoverable. This is due to the blockchain infrastructure that P2E games are built on. By running games on a blockchain – some of the most popular for the P2E model have been Ethereum, Wax, and Hive – gamers can keep their virtual goods in a wallet and use them as they see fit. Whether they choose to reinvest their virtual goods into their in-game characters or liquidate their positions in exchange for cryptocurrency, gamers now have unprecedented control over how they benefit from their time spent playing P2E games.
Cabanatuan City, located in the Philippines' province of Nueva Ecija, has emerged as a stark example of how the P2E gaming model can significantly shift an economy. The Philippines' GDP contracted by a national record 9.6 percent in 2020, as a result of the COVID-19 pandemic. This left many Filipinos, including Cabanatuans, with few options for earning a living. However, the eventual discovery of a popular P2E game, Axie Infinity, would soon change many people's fortunes.
The Pricing Mechanics of Axie Infinity's Economy
Axie Infinity has arguably realized the full potential of the P2E model, both in terms of building a robust in-game economy and improving the socioeconomic status of its users. Axie Infinity, developed by the Vietnamese blockchain development studio Sky Mavis, is based on a collection of small, NFT-based creatures known as Axies.
Players work to improve the strength of their Axies by sending them into player-vs-player combat. Aside from combat, players can breed Axies to create unique genetic variations, purchase and sell land, and trade Axies and in-game resources as part of a player-owned economy. The game has gained traction, recently generating USD$200M in revenue over a 30-day period, which was more than the combined revenue of its ten closest competitors 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.
A Practical Perspective on P2E
The initial cost of playing Axie Infinity is relatively high, but players who approach the game with tact and dedication should have little trouble breaking even and eventually 
Based on historical precedent, new entrants should not expect floor prices to remain at this USD$700 level indefinitely. The price of Axies has risen dramatically in the last two months, with floor prices increasing by a factor of five, and this trend is expected to continue as interest in the game grows. The price evolution can be seen in the chart below, which shows the price growth for Origin Axies (of which only 4,088 are in circulation), MEO Corp. Axies (available in limited-time rollouts), and the cheapest floor Axies:
The question that many newcomers to the Axie universe want answered is how long they can expect to play before seeing a positive return on investment. Fortunately, with a variety of options for recouping the initial investment, many players should have a relatively short time to payback. The main way to make money in Axie Infinity is to farm $SLP, the game's native currency, which will be discussed in detail in the following section. Users can earn $SLP by completing daily quests and winning battles. With payoffs ranging from 1 to 50 $SLP for each objective completed, players can expect to earn up to 250 $SLP per day. At the current exchange rate of USD$0.206/$SLP, players who want to take profits right away can make up to USD$50 on each day's earnings. Having said that, enterprising players will no doubt profit from other in-game revenue streams such as breeding and selling Axies, as well as real estate speculation.
In fact, the top earners in the Axie universe use well-documented strategies to maximize their returns. For one thing, in addition to consistently farming $SLP through the aforementioned methods, the most astute players will postpone the gratification of earning real-world money and instead reinvest their $SLP earnings into breeding new Axies. Strategically, this can result in Axies that are better equipped to win battles, and thus a higher daily inflow of $SLP. The most prolific Axie breeders have established large-scale breeding farms in order to increase the number of Axies owned and new Axies bred through multiplicative reproduction. The ABC method is a well-known breeding farm strategy in which 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 continues with A and B's other children and the second generation of Axies. Above all, the Axie Scholarship Program is the most profitable earning strategy in Axie Infinity. Axie owners can sponsor players who do not have the funds to form their own starter team through this initiative. Sponsors lend their Axies to their sponsored parties in exchange for a portion of the $SLP they earn. At scale, this passive income stream can far outweigh the earnings of users who choose to play the game independently.
Controlling the Price of $SLP
The in-game currency, Smooth Love Potion ($SLP), is the natural starting point for a discussion of Axie Infinity's pricing mechanics. At the highest level, players can earn $SLP by competing in and winning matches, which they can then use to breed new Axies. Given that $SLP is the primary medium through which players can benefit from the game's P2E model, it is critical that safeguards be put in place to prevent depreciation and inflation in the virtual economy. Importantly, there are two mechanisms that work together to control both the circulating supply and the price of $SLP:
Burning tokens: For one thing, $SLP tokens consumed while breeding Axies are burned, which means they are permanently removed from supply. Given the demand for $SLP tokens to breed Axies, this burn mechanism acts as a natural inflation hedge by preventing an oversupply of $SLP.
Progressively increasing breeding costs: Whereas the first breed of a given Axie costs 150 $SLP, the seventh and final breed before that Axie becomes sterile costs 3,150 $SLP. This cost dynamic ensures that as more Axies are bred, more $SLP is burned, implying that decreases in $SLP supply are generally in line with increases in demand. Effectively, this precludes a fall in prices as more people seek to breed their Axies, and generally ensures the value of $SLP is stable.