Billion-dollar crypto gaming startup promised fortunes and caused disaster

    Axie Infinity’s vision of a play-to-earn video game has crumbled, and the company behind it is now telling gamers who bought into the hype that it was never about the money anyway.

    Throughout his life, Alejo Lopez de Armentia has played video games for various reasons. There was the thrill of competition, the desire for camaraderie, and basically the need to while away the time. In his 20s, he felt isolated working for a solar panel company in Florida and spent his evenings using video games to socialize with his friends in Argentina, where he grew up.

    But 10 months ago, 39-year-old Armentia discovered a new game and a new reason to play: to make a living. Compared to the massively multiplayer games he usually played, Axie Infinity was remarkably simple. Players control teams of three digital creatures fighting each other. The characters are cartoonish blobs characterized by their unique mix of interchangeable body parts, not unlike a Mr. Potato Head. During battle, they happily sway in place, waiting to take turns casting spells against their opponents. When a character is defeated, he becomes a ghost; If all three squad members are gone, the team loses. A game lasts less than five minutes.

    Even many Axie regulars say it’s not a lot of fun, but that hasn’t stopped people from spending hours researching strategies, following Axie-themed Discord channels and Reddit forums, and searching for specialized software pay that helps them build stronger teams. Armentia, who has poured about $40,000 into his habit since last August, admits he likes the game, but he also makes it clear that recovery was never his goal. I was actually hoping it could become my full-time job, he says.

    The reason this is possible, or at least seemed possible for a weird few months over the last year, is that Axie is tied to crypto markets. Players receive a few Smooth Love Potion (SLP) tokens for every game they win and can win another cryptocurrency, Axie Infinity Shards (AXS), in larger tournaments. The characters, themselves known as Axies, are non-fungible tokens, or NFTs, whose ownership is tracked on a blockchain, allowing them to be traded like cryptocurrency as well.

    There are several ways to make money with Axie. Armentia saw breeding as his main business, which means less playing the game than preparing to play it in the future. Players who own Axies can create others by parenting two they already own and paying a fee in SLP and AXS. Once they do so and wait a mandatory gestation period, a new character appears with a combination of their parents’ traits.

    Every new Axie player needs Axies to play, which drives up their price. Armentia started breeding last August, at a time when normal economics didn’t seem to apply. You would make 300%, 400% of your money in five days, guaranteed, he says. It was stupid.The creator of Axies, a startup called Sky Mavis Inc., heralded all of this as a new breed of economic phenomenon: the play-to-earn video game.

    According to a mission statement on its website, we believe in a world future in which work and leisure become one. We believe in empowering our players and giving them economic opportunities. Welcome to our revolution. As of last October, the company, which was founded four years ago by a group of Asian, European and American entrepreneurs in Ho Chi Minh City, Vietnam, had raised more than $160 million from investors including venture capital firm Andreessen Horowitz and crypto firm Paradigm, with a peak valuation of around $3 billion. In the same month, Axie Infinity surpassed 2 million daily users, according to Sky Mavis.

    “We must be careful about revealing your location, just as the President doesn’t always have to reveal his location”

     If you think the entire internet should be rebuilt around the blockchain, the vision now dubbed web3Axie provided a useful example of what this looked like in practice. Alexis Ohanian, Reddit co-founder and Axie investor, predicted that 90% of the gaming market would be play-to-earn within five years. Gabby Dizon, head of crypto gaming startup Yield Guild Games, describes Axie as a way to create an investor mentality among new demographics who would later participate in the crypto economy in other ways. In a livestreamed discussion of play-to-earn gaming and crypto on March 2, former Democratic presidential nominee Andrew Yang called web3 an extraordinary opportunity to improve the human condition and the greatest weapon against poverty that we have.

    When Yang made his proclamations, the Axie economy was in deep trouble. It had lost about 40% of its daily users, and SLP, which had traded up to 40, was at 1.8, while AXS, which was once worth $165, was at $56. To make matters worse, on March 23, hackers robbed Sky Mavis of cryptocurrencies worth around $620 million at the time. Then, in May, the bottom of the entire crypto market fell. AXS fell below $20 and SLP settled at just over half a cent. Rather than exemplifying web3’s utopian potential, Axie looked like an endorsement for crypto skeptics who believe web3 is a vision that investors and early adopters are selling people to get them to pour money into sketchy financial instruments while hackers benefit everyone involved.

    As Sky Maviss’ revolutionary rhetoric began to look hollow, the company changed its story. In December, it quietly changed its mission statement, dropping the phrase “play-to-earn” and replacing it with the muddier “play-and-earn.” Days after the hack, it launched Axie: Origin, a long-awaited new version with improved graphics and gameplay tweaks. Crucially, this iteration doesn’t involve cryptocurrencies at all, as Sky Mavis has acknowledged that many players are only willing to jump into a new game when the complications of crypto are removed. Origin is set to replace the original game, with the non-crypto version attracting a broad base of players. Of course, Sky Mavis would continue to offer a full version with the original crypto economy.

    The company’s executives are trying to give the impression that everything is fine, but since the end of last year, the values ​​of Axie tokens have started to fall, a clear sense of tension has emerged. When I first spoke to Sky Mavis co-founder Jeffrey Zirlin in late January, he told me he lived somewhere in the US, but stopped when I asked where in the country he was. I could live anywhere, I don’t usually leave my room, he said. He eventually gave me a more precise location but asked me not to make it public as his team had received death threats. We must be careful about revealing our location, just as the president doesn’t always have to reveal his location, he said. We’re something like heads of state.

    Zirlin said he feels compassion for people who have lost money, in some cases life-changing amounts. But he added that a crash that eliminated Axie profiteers could also have its benefits. Sometimes you have to weed out the people who are just there for the money, he said, it’s just the system correcting itself.

    The history of video games has seen many in-game economies with real-world stakes for their players. Axie’s entry into the market can most directly be traced back to a fad called Cryptokitties. Emerging in the fall of 2017 during the initial crypto boom, these tradable, breedable digital pets were a proof-of-concept for NFTs. As with many things in crypto, the simple fact that they could be bought and sold was enough to spark speculative fervor. Cryptokitties peaked in a matter of months, with some selling for six figures.

    According to Zirlin, the Sky Mavis co-founders originally met on Cryptokitties forums. While living and working in finance on New York’s Lower East Side, he fell in love with digital collectibles. In 2018, he relocated to Ho Chi Minh City, where another Sky Mavis co-founder, Trung Nguyen, had already begun work on a game that would place Cryptokitty-like characters at the center of a larger gaming universe. Nguyen previously founded a social network for food bloggers and then spent three years working for a financial software company co-founded by American venture capitalist Joe Lonsdale. Another co-founder, Chief Operating Officer Aleksander Leonard Larsen, worked as a community manager for a Norwegian game studio. Axie Infinity development began in earnest when the 2017 crypto boom gave way to the first crypto winter.

    The resulting game was hardly a revelation; Sky Mavis’ initial success was more due to a clever innovation in its technical architecture. At this point, everyone developing NFT games relied on the Ethereum blockchain to handle transactions, leaving character trading and other in-game actions to the inconsistent speed and notoriously high transaction fees. Sky Mavis built its own blockchain, Ronin, which reduced costs and improved speed by centralizing the key function of verifying transactions. Purists may have questioned the decision to abandon the core blockchain principle of decentralization, but then again, the game actually worked.

    The other key to Axies’ popularity was an economy based on a form of paid labor that has long existed in gambling: the for-profit gambler. People who owned Axies could rent them out to players, usually in low-wage regions of Southeast Asia or Latin America, who treated the game as if it were a job. Gamers who don’t own their Axies are akin to digital leaseholders, but they’re widely referred to as scholars because they’re said to be using their rented Axies to learn about the broader potential of investing in crypto. In Axies’ largest market, the Philippines, average daily earnings from May to October 2021 were above minimum wage for all but the lowest-ranked players, according to gaming research and advisory firm Naavik. Of course, actually converting that income into usable form meant they had to cash out their cryptocurrencies, at a time when many people involved with Axie were saying that cryptocurrencies would only get more valuable.

    The rise of the scholar class made Axie look like a hit. Player-speculators looking to get in early flooded the game, sending the prices of its digital assets skyrocketing. Many were open about their mercenary intentions. I started gaming because making money from video games seemed pretty incredible and amazing to me, says Filip, a Slovak man in his 30s who asked to be identified by his first name only. While he doesn’t mind playing Axie, he admits he’s in it 100% for the money and 0% for the rest. If I want to play games for fun, I play real games, he says.

    That Axie was widely viewed primarily as a money-making opportunity has proven to be a major problem for its virtual economy. The game is designed to provide opportunities to earn and spend SLP within the game. All tokens spent during the game simply disappear. But play-to-earners instead pay out all SLPs by selling them on crypto markets, meaning the total number of tokens increases over time. The extra supply is pushing prices down in a cryptic version of hyperinflation. Players are constantly chasing Sky Mavis to optimize the way the game works in a way that reduces the amount of SLP in circulation.

    SLP prices peaked last July, but as they fell, players began hoarding tokens in hopes of a market recovery. This strategy is self-defeating, according to Lars Doucet, co-author of a detailed and overwhelmingly negative analysis of the Axies economy published by Naavik in November. Doucet says that Axie is stuck with the sleeping dragon problem: every time the SLP value starts to increase, the dragons, the people who have been waiting to redeem their SLP, wake up and liquidate their stashes, causing the prize pushes down again.

    Even before crypto’s broader meltdown, Sky Mavis was struggling to address the issues with Axies’ internal economy. A financial system made up of people all hoping to put in $1 and take out $2 can only last as long as someone else shows up and believes others will come after them with more handfuls of cash. As Axie started looking less profitable, its ability to attract new players diminished, making it even less profitable and starting a vicious cycle. Axie is just this fascinating story of people learning hard lessons about economics and monetary policy in the microcosm, says Doucet.

    Armentia first heard about Axie last summer from a childhood friend who lived in Argentina, where a lot of people had started playing the game for money. He and his mother emigrated to Florida as teenagers during Argentina’s 2001 financial crisis. After the solar panel company he worked for in his 20s went out of business, he began buying luxury goods in bulk and then retailing them at inflated prices, mostly on cruise ships. That business collapsed when the pandemic hit and he needed a new company. Armentia sat at home with little to do except tinker around on the internet and take care of his little daughter. Armentia was aware that people were making money with strange new investments while his savings were in a bank account. He dabbled in meme stocks and started looking into crypto. He put his first $3,000 into Axie in late summer and soon found himself spending most of his time playing the game.

    In February he agreed to take me to show me his typical workday. Axie collapsed, but he put money into what he saw as temporary market impotence. The week before I showed up he was buying over $5,000 worth of SLP at under 2 because he thought the price had bottomed.

    When I got to Miami, Armentia told me that his wife, who was at best skeptical about his video game business, had forbidden him from letting a guy he met on Reddit into her house. So we met at a Starbucks in a mall in the middle of the afternoon. Armentia appeared in a baseball cap and a t-shirt with a palm tree on it. He has the stubble and tired eyes of a man who has worked in a household with a toddler for the past two years. We ordered coffee, found spots near an outlet, and huddled around his laptop.

    First we played some quick games and scored about 25 worth of SLP. Then he checked into the dashboard he uses to keep track of his 20 Argentine students that he pays his childhood friend to manage before he turned to breeding. Armentia began browsing a market on the Sky Maviss website, scanning Axies that other people had for sale. When he found one he liked, he entered its traits into a software program running in Discord, along with the traits of the Axie he wanted to pair it with. The program predicted what characteristics the offspring would have, allowing Armentia to estimate its market potential. He clicked back and forth between many browser tabs at breakneck speed. Video games might be a spectator sport now, but character breeding definitely isn’t. I felt like I was watching someone do their taxes. There was work to be done, however, and Armentia kept going until it got dark outside.

    When I asked him if this was an odd way of making a living, he told me it made no less sense than his previous jobs. What is the purpose of this bracelet? he asked about the jewelry he had sold to cruise ship passengers. It’s that someone can wear it and feel pretty, or whatever. Let’s say I make an Axie that costs me $30 and I sell it for $60 because I made something that someone else wants. That will bring the same feeling as the people who buy these bracelets.

    Armentia didn’t try to sugarcoat his past performance. He opened a sprawling spreadsheet that he used to track his Axie operations and found that he could theoretically cash out his cryptocurrencies for a $5,000 profit without touching the 100 or so Axies he was holding. I’ve been at it since August, so $5,000 in that many months isn’t anything to be proud of, is it? he said. I could have worked at McDonalds and made more. But then he gave me his predictions for the crypto markets, AXS would go up to $150 by May, he said. He changed a few cells to accommodate those predictions, and suddenly his venture actually seemed more lucrative than flipping burgers.

    When the end of May actually came, AXS was around $23. Armentia estimated his Axie investment was down about $15,000 but said he doesn’t know for sure because he stopped looking at the chart.

    On May 18th, Zirlin and Larsen gave a pep talk for the Axie community on Twitch. In the days following the March hack, the company announced it had raised $150 million to compensate victims and repair its infrastructure. But almost two months later, the systems compromised during the hack were still not operational, and executives were unsure when everything would be fixed. (A company spokesman said on June 3 that this could happen by mid-month, pending the results of an external audit.)

    The co-founders spent a lot of time grieving on Twitch with gamers over the pain the crash had caused. Larsen told the 2,500-strong audience that the collective trauma of losing all that money was an opportunity to forge a stronger community. This is when you can find true friends in space, he said. Zirlin, who spent the entire hour-long session grimacing indicative of indigestion, found that sadness was contagious. Sometimes when you post negative opinions on the internet, it affects others and harms the project, he said.

    Sky Mavis had reason to worry that players might lose hope. By the end of May, even high-level players were earning the equivalent of 68 per day, according to Naavika, which doesn’t account for the cut scholars have to give their managers. The company and other big players in the axie economy worked to convince everyone to persevere. Yield Guild Games boss Dizon, whose company owns more than 150,000 Axies that it rents out to scholars, says games like Axie were always meant to be stepping stones to something else. We tried to warn people that even if the prices were high, don’t expect this to be a stable source of income, he says. Dizon’s pitch now focuses on the value of owning NFT gaming assets over time, with the potential for additional cash along the way. It’s a digital version of a gig economy job, he says.

    So, La goes back to basics and hopes to make Axie more like Pokémon Goa, where players can spend in-game money on things like decorations for their avatars. He says it’s still important that people own their Axies, even if it’s not just for the financial benefit. With that comes the opportunity to sell those things when you stop playing or something, La says.

    Armentia has largely stopped playing Axie, as have about three-quarters of his students. Many got away with tokens that are now worth next to nothing. But at least one was sufficiently seduced by Axie’s potential to take out a substantial loan to buy AXS tokens, which he saw as a way to hedge against Argentine peso inflation. The national currency has depreciated since the loan was taken out, but not nearly as much as AXS.

    For his part, Armentia says he thinks Origin is poorly designed and doesn’t have high hopes that it will bring the significant new user base the game needs. However, one thing I learned after talking to Armentia for several months was the consistency of his optimism. He continues to express his confidence that Axie will pay off as an investment over the long term, that crypto gaming will inevitably take over a significant part of the gaming world, with Sky Mavis using its role as an early market leader to hold a key position.

    But Armentia’s spirit was elsewhere, too. Earlier this year, he and a friend bought a company that rents out bouncy castles. Instead of crypto prices, he spends his days worrying about what to do when a driver calls in sick or whether to dispatch his crews when there’s a possibility of a tropical storm. In early May, on one of the most brutal days in the crypto markets, I texted Armentia to see how he was doing. He responded with video of a giant inflatable slide complete with cannonball foam. He has had plenty of time to wait for the crypto markets to turn around, he said. He then described his new business as Sky Mavis now describes his own: I’m selling fun now.

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