From Fintech Lab Wiki

Extracted by Dan Dubokovic BSc Thesis entitled 'Tokenomics of Play-to-Earn Games', Spring 2022,


Play2Earn games have taken the cryptocurrency scene by storm in 2021, with the most notorious title, Axie Infinity[1], reaching a token market capitalization close to 10B USD[2] at peak, compared to 31M USD at the start of the year 2021. These games attracted a lot of attention from investors and speculators, as well as traditional gamers. The ownership over these games is distributed among many holders of governance tokens, but an important role is also played by the utility tokens used inside such games to interact with the game’s internal economy. What is interesting here is how such games attempt to attract capital to sustain such high valuations, while still maintaining a resemblance of a video game we know from the pre-crypto days.

This is what the word “tokenomics” refers to, i.e. the inflationary and deflationary pressures of various game design features, which all play a role in the amount of circulating supply hitting the market and thus, holding outside demand constant, heavily impacting the token prices. An additional level of complexity is introduced to tokenomics with Non-Fungible Tokens (NFT hereafter) traded on marketplaces, as they play a fundamental role inside the game. The term Play2Earn (P2E hereafter) now gets attached to almost every new game launched in the crypto space. It seems like wishful thinking that someone could earn a salary just by playing a video game and it’s obvious that all these games and their economic models are highly experimental[4].

At its most basic, P2E means a player playing the game to obtain tokens with some value inside the game that they own and have total control over, and that they can sell on the market. Where that value comes from, varies from game to game, but these tokens can generally be turned into NFTs, which are sold, or they are required to play the game in the first place, creating a feedback loop that is fed by new players coming into the game’s ecosystem.

This sounds like a pyramid scheme and so far, games are still struggling to make their economies actually sustainable, as will be noticeable later in this analysis.

Disambiguation of terms

Understanding the Play2Earn space is impossible without having a solid understanding of blockchain technology and cryptocurrencies. P2E is an evolution of both gaming as we knew it before crypto and crypto itself, utilizing both the technology and the economic and financial concepts in use in decentralized finance (DeFi). While one does not need to understand the underpinnings of the P2E space on such a technical level to be able to play its games, it is useful for this analysis to thoroughly define all the concepts and terminology in use.


Blockchain, as defined by IBM is "a shared, immutable ledger for recording transactions, tracking assets and building trust."[3] It's a decentralized ledger of transactions and accounts that can hold tokens, such as Bitcoin or Ethereum. There are many different types of tokens, the most famous being Bitcoin, originally designed as a decentralized anti-inflationary currency[4] and Ethereum, a "world computer" capable of executing smart contracts[5]. Both can be called Layer 1 (L1) tokens that play a fundamental role in incentivizing the basic functioning of their respective blockchains, meaning miners or stakers get paid in this currency to add blocks to the chain and thus process transactions or execute code.


When talking about tokens in a more general sense, what is most often meant is "governance tokens". These tokens represent shared ownership over a piece of software called a protocol. This software, in combination with its off-chain counterparts like the website, the community and its presence on centralized exchanges, is stored on the blockchain itself, where users can interact with it via proprietary smart contracts. This is in contrast to so called "utility tokens" that do not represent ownership but rather serve a function inside the protocol or game. An analogy to utility tokens in traditional gaming would be World of Warcraft gold, only ever being used to trade in-game items, while the governance token would be a share in the game publisher, Activision Blizzard, Inc. (ATVI), currently listed on the NASDAQ[6]. Governance tokens sometimes make the holder eligible to receive yield from revenue generated by the governed protocol, sometimes they are also used in actual governance voting on protocol features in the context of a DAO (decentralized autonomous organization). Some P2E games, such as Illuvium, have expressed interest in eventually relinquishing control over game development over to the DAO formed by the holders of their governance tokens[7].

Tokenomics as Stakeholder Token Allocations

The term tokenomics itself is very ambiguous even for crypto-native investors and speculators. The two most often attributed meanings are firstly the governance token allocations to various parties when the token is created and secondly the burning and minting mechanics that govern the monetary policy of the token, as well as the token's utility inside the protocol.

We are mainly concerned with the second meaning but the first one needs a clear definition as well, as it plays an important part in how P2E games are built and launched. Teams mostly decide to issue governance tokens as a way to acquire funding from investors. Investors fall into two camps, institutional and retail. Institutional investors into P2E are mostly VCs[8] and large guilds[9] (guilds accumulate in-game assets and lend them out to players who cannot afford them for a cut of the revenue they generate) which get large token allocations in exchange for seed funding at lower prices than the public, often long before the game is launched. The public sale of governance tokens (sometimes called IDO -- initial DEX offering, or ICO -- initial coin offering) happens later and at a marked-up price, often on so-called "launchpads" that aggregate initial offerings. After that, the tokens are listed on decentralized and centralized exchanges. The remaining tokens that were not sold to investors are kept for the founding team (usually around 20%[10]), the treasury and yield farming incentives. The treasury's purpose is to fund further development in case the seed funding runs out, or to fund the ecosystem in a more cost-effective way. The yield farming part is more interesting, as its instrumental to the way DeFi and P2E protocols market themselves to investors and attract new capital into their ecosystem (more on this later).

Yield Farming & Liquidity Provision

Yield farming is the protocol giving out their native (governance) token to users of their product and suppliers of capital to liquidity pools (more on liquidity pools later in disambiguation) for "free". The latter have to be incentivized, as liquidity providers bear certain risks that need to be offset by extra returns on top of the usual fees charged to users of the pools, which are often barely noticeable compared to yield farming rewards. The former, the simple users, are given governance tokens both with the purpose of decentralization and shifting ownership to the community and for marketing purposes in competition for attention with other games on the market. Once the tokens allocated to yield farming run out, the amount of liquidity in these pools also often dries up. The other use case is simply rewarding the use of the protocol with free tokens. The most famous example of this, while not in P2E, is Uniswap, a leading decentralized exchange on Ethereum, with the liquidity dropping by almost 50% immediately after its token program ended[11] (in the case of Uniswap, providing liquidity was the actual use of the protocol, so the two types of yield farming might look similar, but they are distinct). More on the particular case of the Axie governance token, AXS, and its role inside the game later.

Tokenomics as Internal Token Economics

While the other meaning of "tokenomics", primarily related to utility tokens of games and their interaction with governance tokens and NFTs will be discussed in much more detail later, it's useful to discuss it now as well. The price of the utility token is what determines the revenue generated by players that trade these tokens for more liquid cryptocurrencies such as ETH or USDT. This makes sense as the revenue in USD terms is Number of tokens * Token Price. The number of tokens earned by players per unit of time is the output of a tokenomics calculation. In aggregate, the total output of tokens per day is called "daily token emissions" and creating a new token from scratch in this manner is called "minting". Emissions increase the "money supply" inside the game's economy, and keeping demand constant, the price would be constantly falling. This is a problem for players as the number of tokens they can farm per day is somewhat fixed and subject to in-game mechanics and their skill in the game, which changes slowly. This is why the game economy needs a counter effect to token emissions, called "token burning", tokens being spent inside the game instead of sold. Keeping market demand constant, if the two effects were equal the price would be constant as well, as the number of tokens in circulation would stay the same. Of course, demand is never constant and broader market dynamics play a big role in determining the price of the token, but carefully designed tokenomics are a prerequisite to a sustainable price. In general, token emissions are a lot easier to design than token utility (an opportunity for token burning). If there are more emissions than burning, the economy is called "inflationary", in the reverse case its "deflationary". It should be noted here that in certain cases tokens have a "total supply" (not to be mistaken with "total circulating supply"), an example being Bitcoin, that stays fixed throughout the lifetime of the protocol. This is especially important in deflationary token economies where tokens are getting more and more scarce and thus more valuable, while in inflationary economies the supply cannot be fixed forever as at some point circulating supply reaches total supply and total supply needs to be expanded or the economy can no longer inflate.

NFTs & In-Game Assets

NFTs or non-fungible tokens have been mentioned many times thus far and they need a definition as well. The definition used by Ethereum is "NFTs are tokens that we can use to represent ownership of unique items. They let us tokenize things like art, collectibles, even real estate. They can only have one official owner at a time, and they're secured by the Ethereum blockchain -- no one can modify the record of ownership or copy/paste a new NFT into existence."[12]. NFT technology, while not completely new, saw major public interest and adoption in 2021[13] and plays an instrumental role in pretty much all P2E games, on top of the before-mentioned tokens. NFTs, as the name suggests are also tokens, but unlike utility and governance tokens they represent something unique or semi-unique inside the game, such as an Axie Creature[14]. These NFTs are often purchased either with the in-game currency (utility token) or with other cryptocurrencies such as ETH on open markets. As mentioned before, the primary difference between NFT in-game items and traditional in-game items is ownership and tradability. You have control over your NFTs via your blockchain wallet and can buy or sell them on open markets either facilitated by the game itself or hosted by third parties, such as the NFT marketplace Opensea. Peer to peer exchange of NFTs is also possible.

Trading Fungible Tokens & Token Exchanges

Long before trading NFTs was a thing, people were trading fungible tokens using liquidity pools. Decentralized exchanges (DEXes) use liquidity pools and mathematical functions such as the constant product formula[15] used by the Uniswap Automated market maker (AMM) to allow traders to exchange one token for another. These AMMs do not require external market making, unlike centralized exchanges and traditional equity markets and are simple to set up, but have major drawbacks in the often sub-par trading experience due to price slippage (price at which the trade is executed changing mid-trade), network fees, frontrunning transactions etc. Slippage risk is reduced by having more capital on both sides of the pool[16], so protocols incentivize providing liquidity with yield farming rewards to make the trading of their token smoother. Regardless, protocols use them due to their simplicity and the fact they are often permissionless, meaning anyone can set them up by supplying the initial liquidity to both sides of the pool (Token and USDC, a USD pegged stablecoin for example). These DEXes play a major role in the in-game economy, but a lot of trading also happens on centralized exchanges such as Binance or Coinbase. Only tokens with some existing adoption get listed on such exchanges but they do make the trading of the token more frictionless and open it up to less sophisticated investors which cannot use DEXes, as they require quite a lot of knowledge to use. Therefore, protocols aim to get listed on as many centralized exchanges as possible, on top of having solid liquidity pools on DEXes.


Another DeFi concept we should be familiar with is so-caled "staking". Staking can take different forms, but we will limit ourselves to the ones relevant to P2E. In essence staking is locking a token in exchange for a yield in said token in the future[17]. Protocols allow staking to take tokens off the market and thus prevent selling. Staking can be locked or liquid and often governance is limited to users who have locked their tokens for longer periods of time. The tokens yielded to stakers often come either from a separate tokenomics allocation of staking rewards[18] or alternatively from the yield farming allocation. The purpose of staking, like yield farming, is also marketing, as staking is only exposed to the market risk of the staked asset. At some point the staking rewards run out, but this has largely not happened as protocols stretch out the emissions over multiple years.

Play2Earn vs. PlayAndEarn

Lastly, let's tackle the most used technical term so far, Play2Earn. This term has also encountered some ambiguity lately with the advent of another concept, PlayAndEarn (P&E), as well as many "games" falsely branding themselves as P2E for marketing purposes just to sell their NFTs, while not being games at all.

P2E has been called a new generation of work[19], where players get paid for performing tasks inside the virtual economy and putting in their time and effort into creating value that other players desire and are willing to buy off of them. What gives the fruit of their work value inside the game is the provable nature of the work itself that other players and potential buyers also recognize and assign value to. An important note here is that blockchain games are often branded as less prone to exploits that would allow someone to circumvent the work need for the creation of the asset. But where does this "value" come from?

Firstly, it can be in the form of cosmetic or very powerful items that act as status symbols due to their scarcity or the fact they were difficult to obtain, thus showing a high level of skill. They have real value to dedicated players that the earners can extract and convert into money. This method of extracting value from the game was already prevalent before the advent of blockchain games, with certain rare cosmetic items in World of Warcraft going for large sums of real money[20]. The second model of value creation is creating in-game assets required for others to also play the game, such as the Axie model. To play the game, you need a set of in-game assets and to obtain these assets someone else had to put in work to produce the in-game resources required to create them. This again gives them value on the secondary market, but this model relies on the constant influx of new players wanting to get into creating more assets as well. This type of game also doesn't lend itself to the best gaming experience, as the actions performed are repetitive due to the finite number of assets that can be created and sold. This way of reasoning is very abstract and explaining it later using an example will illustrate it better.

Due to the lack of focus on a fun gaming experience with P2E, the P&E model is gaining ground. As the P&E game The Red Village explains[21], the concept of P&E is a hybrid of traditional gaming and P2E, keeping the core concept of ownership but ditching some of the DeFi ideas such as yield farming and taking a different approach to tokenomics. The concept of P&E hasn't taken off nearly as much so far, and the distinction between the two can be blurry. With both, playing the game results in earning, what P&E wants to avoid is the monotonous experience of playing like you are working and replace it with a more passive earning while playing and actually enjoying the game. A topic of further research could be comparing the two models' earning potential for various types of players.

State and Purpose of Academic Research into In-Game Economics

While the field of study of Game Tokenomics is not established in an academic sense, it is regarded as legitimate in cryptocurrency circles, with some research firms publishing reports and articles about the topic. As an example, the crypto research firm Economics Design in collaboration with Leminscap VC published a report with the title of "Economics of Play to Earn Gaming Economy"[22] where they outline the basics of the token economies of some of the top Play2Earn (P2E) games. Besides that, finding literature on this topic has proven incredibly difficult.

This does not hold true for the study of economics of traditional video games. The actual history of research into interactive game economies started long before the advent of mainstream adoption of cryptocurrencies. Lehdonvirta and Castronova (2014) published "Virtual Economies Design and Analysis", focusing on the possibility of application of rigorous analysis to in-game economies of games and virtual worlds[23]. They already considered the real-world effects and possible applications of such in-game economies in solving social and other issues.

Further research with a case study on World Of Warcraft (Blizzard Entertainment) led to observations about the effect of changes in in-game mechanics on the conversion rate between the in-game "gold" currency and USD[24]. It has been observed that, for example, after the release of a new game expansion where more end-game content was added (meaning that more high-ticket items were introduced as well as more powerful ways to obtain resources and items in the existing game areas), there was an observable effect on the conversion rate between gold and USD with higher inflation and a devaluation of gold compared to USD, resulting from an increase in the in-game money supply.

This brings us to the core of the concept of in-game economics. How does game design impact the monetary reality of the various in-game tokens and in the case of crypto games, the governance token of the game protocol? Lehdonvirta and Castronova (2014) already applied macro and microeconomic theory analysis to virtual worlds, but with the introduction of cryptocurrencies into the equation of virtual world economies, they became faster, more liquid, competitive and now offer a place for speculation.

Academic research on the topic is important as P2E is proving to have profound real-world effects on player communities. In fact, P2E games have been compared with menial labour[25] as they often rely on repetition of an action over and over again. While Axie is somewhat skill-based[26], in the end your earnings are determined by the number of hours you put in, which sounds a lot more like work than play.

Another factor that cannot be overlooked is the demographics of the game's players and investors. While traditional games like WoW have players from all over the world playing together or divided into regional servers to improve performance, Axie's players are concentrated in a few developing countries, primarily the Philippines[27], second being Venezuela, while the investors and owners of the NFT assets usually come from developed countries like the US. The Philippines is dominant with around 40% of all players, which is partly the result of targeted marketing and offering so-called "scholarships" in Filipino communities[28]. There is a thriving "guild" ecosystem centered around renting out the NFTs needed to play the game to poor gamers and taking a share of their earnings as a fee. The term guild in traditional gaming usually means a somewhat equitable organization of players working together towards a common goal in the game, but the guilds of P2E are organized like hierarchical companies with managers organizing the "scholars" in a very structured way[29].

All this points to a change in paradigm, where games are moving away from the fun "virtual world" used by gamers to escape reality towards a closer reflection of our real societies along with all of their problems, such as quite clear inequality. This at least seems to be the case for P2E games of today, but they have undoubtedly not reached their final form yet and are still in a very early stage of development. Some are calling for a more equitable and fair approach to P2E gaming[30], one that would try to solve issues, not deepen them. One of the largest P2E guilds in the world, YGG, states in their Q4 2021 Community Update[31]: "While emerging markets have shown higher interest in earnings than in gameplay, a more "fun first" ecosystem with a game economics layer is a growing strategy to encourage traditional gamers and those from developed regions to try blockchain gaming and explore the Metaverse."

A note on fun gameplay

To make the discussion of game tokenomics objective, avoiding qualitative judgements on how "fun" something is is necessary. Fun, in the case of P2E games is relative to the approach you take to playing the games. If one plays the game to put food on the table, fun is not of primary importance anyways, and yet P2E games describe their long-term aims as creating a game that is actually fun[32]. This makes sense from an economic standpoint, as attracting a new generation of wealthier gamers that actually play for fun is imperative for sustaining the current game economy on the long run, with a healthy influx of new capital to pay for the play-to-earners who stick around only if the game is more profitable than the other games on the market. If the possibility of earning should remain, it could represent a powerful marketing driver for the game as people might value playing and earning higher than just playing, which happens with traditional games.

Having said that, there will be no further discussion on the fun aspect, as it's not measurable and comparable across games.

Where do governance tokens and utility tokens get their value?

As mentioned in the introduction, the market cap of the Axie governance token reached almost 10B USD at its peak. To understand why the token of a simple game became so valuable, we need to understand the mechanism by which investors make decisions in the crypto space. In the context of the "hype" surrounding P2E games in 2021, Axie quickly rose to the first spot[33]. While the team has outlined a roadmap for decentralized control over the community treasury[34], the pot of capital accumulated over time through marketplace fees, which is valued at around 800M[35] at the time of writing, via the governance token, there is no concrete timeline and so far, no progress has been made towards decentralizing control. Control over such a large amount of capital would represent tangible value to token holders, as they could direct it to initiatives they see as beneficial to themselves as agents. The AXS governance token also plays a significant role inside the game and is required for the "breeding"[36] of new Axie creatures. Additionally, AXS can be used on the Axie NFT marketplace to purchase Axies and pay marketplace fees[37], acting like a "payment utility"[38] token. In this way it resembles the game's utility token, SLP (Smooth Love Potion) that is also required for breeding. The AXS token is not obtainable by playing the game, except on rare occasions as rewards for outstanding performance. The only way to obtain more AXS is to either buy it on the market or "stake" your existing AXS tokens and get yielded more.

Lastly, the AXS token in theory represents ownership over the whole protocol, its intellectual property, the yield it generates, and all future products associated with the game. This could be possible via token-based governance that, again in theory, allows for changing each one of those components of the protocol as the token holders see fit, including directing the various cashflows to themselves and paying them out in a type of dividend, which would make the tokens closely resemble stocks with voting rights and a promise of future payoffs. So far, crypto protocols have avoided this as it would classify their tokens as securities according the 1933 Securities Act[39], which would in turn require them to register with the SEC and go through the securities issuance process which is long and expensive. There is an ongoing debate about the classification of governance and other tokens as securities and the field is evolving fast[40], as well as the regulatory response.

With the lack of concrete cash payouts and non-existent control over the treasury and direction of the protocol's development, why do investors even buy governance tokens? If we ignore their in-game utility in Axie (which is a strong point for buying in that case), there is no tangible benefit to buying and holding tokens. People therefore have to be motivated by either the expected appreciation of the assets (especially if past returns were highly positive) or in the case of strong yield farming or staking programs, owning the tokens is a prerequisite to obtaining more tokens, in which case even a stable or slightly declining price would be enough for a positive expected value of the investment. In other words, investors are motivated by pure speculation.

While there is no concrete data on the demographics of AXS holders, due to the anonymous nature of cryptocurrencies in general, we can expect it to be very different from the demographics of the player base. As mentioned before, obtaining AXS by just playing the game is not possible now, although there are plans to change that in the future[41]. This means the play-to-earners which are almost exclusively from developing nations cannot afford to invest into speculative assets such as AXS. While retail does have a presence, guilds are very large owners of AXS[42], on top of institutional investors that participated in the funding rounds, including a recent one where Axie raised 150M to cover the loss due to a hack affecting the protocol[43].

SLP, the utility token is, on the other hand, owned in a significant part by the players (and also guilds that are often the ones responsible for actually breeding the Axies with the SLP token). Its market cap is much lower, and it experiences a huge volume to market cap ratio[44], indicating that despite having strong utility in the game, there is still a lot of sell pressure from players taking profits.

The price of the utility token has another effect. Demand for playing a game is somewhat automatically balanced based on the profit one can expect, versus the expected profit from playing competing P2E games. If a new game pops up some players might leave game 1 for game 2, thus creating less competition in game 1 and increasing returns to players that remain. Eventually an equilibrium point is reached. There are other effects like time spent increasing one's skill in playing the game, investments made into in-game assets and how liquid the markets surrounding them are.

As a last point, it has to be noted that cryptocurrencies in general are heavily cyclical[45]. This affects also the markets of both governance and utility tokens of games. These effects can be a lot stronger than any "burning pressure" or supply reductions a game can design into its tokenomics model. In other words, the returns to players are also dependent on the general market sentiment. Huge tokens like Axie at its peak also require much more capital to move and create returns for late investors, while smaller cap tokens might move significantly with smaller capital injections that are easier to muster. This is part of the "hype" dynamic surrounding cryptocurrencies, where investors are attracted to disproportionate returns which are progressively harder to replicate as more people want in.

P2E tokenomics at work: the Axie game,

It is a lot more informative to illustrate the key issues surrounding P2E tokenomics with concrete examples from a game like Axie. The design of its economy displays some of the common problems with tokenomics and its well-documented history and technical documentation makes it easy to accurately analyze. Topics are also approached in a more general sense and potential solutions are proposed, despite not having a practical example implemented in Axie.

It's finally time to dive deeper into actual tokenomics design and analyze the inner workings of the Axie in-game economy. As mentioned before, the economy runs on 3 different assets: AXS, SLP and the Axie NFTs. This resembles the structure of most P2E games. On top of this another asset are Land NFTs, but they are not fully implemented yet and thus do not play a role in the economy[46]. Another asset that should be mentioned is Eth, the native token of the Ethereum blockchain the "sidechain" Axie runs on is connected to. The sidechain itself, called Ronin, also has its own token but discussing the details of the RON token is beyond the scope of this investigation. Eth plays an important role as the vehicle by which capital enters the Axie ecosystem, as well as being the currency for buying and selling the Axie NFTs, on top of AXS. Axie has introduced a Ronin-native Decentralized Exchange, Katana[47], so assets do not need to leave the ecosystem to be traded with each other. This does not have a direct impact on the in-game tokenomics, but it does improve the liquidity of assets and might change some user behavior.

Each interaction should be looked at in the context of either "burning" or "minting" tokens. One decreases the supply, the other increases it. There is also a distinction between burning a token (removing it from existence altogether) and sending it to the community treasury. The AXS and Eth that users pay in the 5.25%[48] marketplace fees get sent to the community treasury, where they are kept and, in effect, also removed from the market. The AXS portion of the breeding cost is also moved to the community treasury.

SLP and the Woes of the Utility Token

Let's focus on SLP, the utility token, first. SLP can only be minted by playing the game, meaning that all the SLP on the market was produced by players[49]. There used to be three ways of producing SLP: daily quests, PlayerVSEnvironment gameplay and PlayerVSPlayer Gameplay[50]. The last method is the last remaining one and was always the most profitable but also most competitive. The first two were removed in early 2022 in order to reduce the emission rate, this was needed due to the falling price and pressure from the community.

The fundamental issue, also noted by the developers of Axie, was the disconnect between the burning and minting of SLP: "To put things in perspective, the average amount of SLP burned per day has grown over 500x (50,000%) through 2021! However, that must be contrasted with breakneck SLP creation, which historically has consistently outpaced its use, and has additionally grown over 160x (16,000%) over the last 12 months. Today's data shows a growing chasm between SLP minted vs. SLP burned (Figure 2). This inflation in the token is not sustainable."[51] As shown by the chart here there is growing disconnect between minted and burned SLP. The price of SLP was quite obviously not where the developers wanted it to be during this period, and the livelihoods of the players were directly affected. At the same time some other P2E games went live, including Gods Unchained which peaked in December[52] and while the effect of auto balancing of returns described before did likely occur, the incoming capital also shifted to new opportunities, representing competition. More recent data[53] paints a grim picture. At the end of March on a particular day the ratio between minted and burned SLP reached 900x. In the last 30 days the average ratio was 26.4x. This represents a very common problem for many tokenomics models, where minting outpaces burning. There are individual design choices that lead to this outcome and many of them will be described later, but the true nature of the problem requires further research.

User Growth Explanation

The explanation for the mismatch provided by the developers of the game was that it was due to faulty expectations of the growth of the player base of the game. As mentioned before, each new player entering Axie requires Axie NFTs to play, which must have been created by older players. Thus, there had to be some inflation of the token pre-planned to keep up with increasing demand for breeding of new Axies via the demand by new players to join the game. The design either overestimated the projected number of new entrants or was faulty in general and the consideration of player growth was made post-fact, possibly as a PR attempt to shift some responsibility.

User behavior inside the game is incredibly hard to predict, for example how many hours per day will the average player play? While Axie did balance the game economy throughout its existence, these balancing actions were rare and careful. Secondly, players naturally increased their skills and were able to generate more tokens, even if all other factors were kept constant, especially in the PVE game mode where their improved skills were not matched by their opponents (opponents being preprogrammed). Thirdly, some users used bots to automate the farming of the tokens in the PVE and Adventure game modes[54], which was part of the reason they no longer yield tokens now. Bots are a big liability for any in-game economy, as they do not require rest and can perfect menial actions. Fourth, the process for adjusting emissions was always manual and not formulaic, meaning it had a delayed response and was subject to human error and external pressures.

We talked about matching the token emissions to the growth of the player base, but the other adjustment that would have been necessary was increasing the power of the burning mechanisms. Either by increasing the price of the breeding or adding more novel ways of burning the token. The second option introduces development costs, which the team could not afford due to time constraints. They used the first option in early December[55], but it seems like it was not enough. Let us closely analyze the situation.

Attempt at SLP Pricing Intervention

On the 8^th^ of December 2021, a tripling of SLP prices for breeding was announced. This, in theory, should triple the amount of SLP burned from there on out, given constant demand for bred Axies and given that supply has not changed. Increased demand for SLP should mean increased price. Looking at the chart available here for the relevant period, the spike in price matches the announcement exactly, but in the next two weeks the price kept falling. After that, the breeding price and thus the intensity of burning was never raised again. This was the second increase in 3 months[56], and the community was very worried, as monthly earnings of the play-to-earners were plummeting. As mentioned before, in early 2022 they attempted to curb the supply side, but the overall picture stayed negative.

This looks discouraging, if our expectation was that manual post-fact balancing was a viable way of addressing challenges in the model. Once the token hits the market, the "exceptional" interventions lose a lot of their power. The damage had already been done.

NFT Prices and SLP

There is another dynamic that plays into the price of SLP. The so-called "floor price" of the Axie NFTs, or the lowest price they are selling for. An X amount of SLP and X amount of AXS (more on this later) is needed for each breeding, and the number of tokens spent has a very tangible monetary value. Ignoring the "quality" of the bred Axies, the floor price should always be equal or above the cumulative price of the tokens needed to breed one Axie. In fact, there is an assumption of some spread[57] between the two, so the breeding makes sense from an effort standpoint and the fact you are going from 2 liquid assets to a much more illiquid asset, the NFT. The issue here is that the Axie NFT market has its own dynamics and is very closely driven by demand from new players entering the ecosystem, which are much more likely to just buy Axies, rather than buy tokens and then try and find someone with Axie NFTs that can breed them new ones. If the demand by new or existing players for more Axies slows down this would in turn heavily impact the demand for the two tokens and lower their price as well[58]. This introduces another layer of complexity and makes the game even harder to balance manually. A lower SLP price in turn means a lower cost basis for the NFTs, as well as lower percentage share of the total breeding cost represented by SLP, increasing the AXS share which hurts players as they have to buy the AXS to breed. This discourages them from trying the profit from the spread on the NFT market, meaning they simply sell the SLP they farmed, instead of burning it, causing a vicious cycle of an ever-larger chasm between burning and minting. All this reduces the value of SLP as a utility token, as its contribution is becoming meaningless, making farming it meaningless as well.

Discussion on open issues

To recap the observations about the SLP part of the Axie economy, the minting far outpaces the burning, causing an excess of supply of SLP to flood the market and causing excess selling, reducing the income of the players, lowering the value of the NFTs, increasing the AXS share of the breeding cost and making the SLP meaningless as a utility token. Dropping of prices also induces players to leave the ecosystem (possibly selling off all their assets in the process), as well as hurts the marketing efforts of attracting more new players, tying up the vicious cycle.

AXS as an Extraction of Value

It's never clearly justified why the breeding fees include AXS, other than "Continue to provide some utility [to] AXS through its role in the breeding process.". This brings AXS close to being a hybrid token, a mix of governance and utility, but it is generally still regarded as a governance token[59], even by Axie itself. This mechanism forces breeders to constantly buy the token, providing buy pressure, as there are very few ways to earn it in-game. The biggest problem here is that requiring AXS for breeding takes away utility from the real utility token and puts a strong limit on players to make money by just playing, especially as most of them don't have sufficient initial capital to purchase enough AXS to keep breeding going. This system increased players' reliance on guilds who could afford the AXS part of breeding and diminished the earnings and independence of players. The motivation for such a model could certainly be the incentives the developers of the game have set for themselves, stating "The developers monetize through their ownership of AXS tokens."[60] in the game's whitepaper. They are thus motivated by the appreciation of the AXS token, not directly by the appreciation of SLP, although that would certainly have second order effects. This could be one of the fundamental problems with the Axie economy, possibly driven by greed and not uncommon in the broader DeFi space and Crypto in general.

Dynamic Pricing Model

Another problem is the rigid burning component of the mint-burn equation. While minting is heavily variable and has many factors that affect it, burning, while also driven by demand, is affected by fixed prices of breeding which changed very rarely, despite the clear problems. In both the September and December breeding price adjustments, the developers express a desire for an automated balancing system by "intelligent machines"[61][62]. The more fundamental change is really going from fixed pricing to dynamic pricing of utility. Whether it's controlled by humans or machines plays little role, although a completely automated system would likely be preferable. By pricing the burning dynamically, the economy could match much more closely the current demand by new players, which was historically used as an excuse for the overproduction of Axie NFTs and the oversupplying of SLP. By using, for example, new Ronin wallets created or new downloads of the game's software as an input the reaction to changing demand could be fast and accurate. On top of that, another input could simply be the amount of SLP minted that day and having a target ratio of mint to burn that the utility pricing would follow. This is easier said than done and the design of such an algorithm would be difficult and would take a long time, especially given the complexities of developing on the blockchain. But given that the future of the game is at stake, no cost is too high. This would also set different expectations among players and investors. Now manipulations were exceptional, if they were constant players would likely not delay spending as they would not know whether the price would go up or down.

Token Buybacks

Another popular "solution" to low prices in the crypto space are so-called buybacks, where a protocol spends a part of the fees It generates in liquid tokens like Eth to buy its governance or utility tokens on the open market, directly increasing their price. This was suggested by the Axie community as well[63]. No concrete research on the effectiveness of token buybacks could be found, but in general there are some problems with the approach. Like with stock buybacks, investors often perceive it as the company management not having a more productive use for the capital with a higher expected value than the buyback, which has a very limited expected value. Secondly, as most protocols are the largest suppliers of their own liquidity in liquidity pools, they are buying tokens from themselves and locking capital in the pool, with no possibility of taking it out without affecting pool performance. Thirdly, buybacks are sometimes predictable and gameable, with a possible swing trading opportunity right before the buyback, which immediately decreases its effectiveness and signaling power. The community may like the approach, as they currently have no benefit from the community treasury otherwise, so they might be willing to use it even in inefficient ways and for a marginal benefit to themselves. This exact situation is common across DeFi as well.

The Axie team had some other proposals which might have had a marginal effect, such as adding additional token utilities in the form of cosmetic changes to NFTs but the effect of these ideas would likely be barely measurable.

In conclusion, the Axie economy over-relied on the influx of new players with new capital and overestimated the demand from their side with aggressive emission schedules that didn't match the actual or (at the time) future demand. The difference between minting and burning is growing and the percentage of platform fees denominated in Eth is falling, meaning less fresh money is coming into the ecosystem with more regurgitation of old capital by incumbents with sunk costs.

This could become a very general problem with P2E. If you want a class of players that constantly extract value and treat the game as a job with a salary, you need an equal stream of capital just to keep the economy level, not to mention growth. There will be an endless supply of new games with lower market caps and more earning potential for speculators that will end up being your competition for new capital. The fundamental change that has to occur is the motivation behind capital injections into a game's ecosystem. Moving away from speculation, which is unsustainable, towards either meaningful utility (future of work) or the elusive "fun". People have always been prepared to pay for fun, can that support millions of players in developing countries? Only time will tell.


After examining the current and past situation of Axie token emissions, it's clear that the economy has deep flaws that led to the drastic drop in prices over time, with issues common to the broader P2E space. This had a direct impact on the players, many of which relied on Axie to survive, especially in the Philippines. The design of the game's economy had real-world consequences, which should emphasize the need for further research on this topic. If we are to transition to a "new generation of work" that will include play2earn, we must make sure games don't have an expiration date for their economies with further academic research on their internal economics. With such a fast-evolving field rigorous analysis is hard and with the wealth of extraneous variables affecting the economies in question, all the work might be for nothing, but it is nonetheless required to put our best effort forward and apply both what is known about real-world economies and find new ways to balance out virtual economies using the innovative technologies they are built around. They can also offer a novel experimental environment for economic research that could be leveraged to test various models, meant to be eventually applied in the real economy, of course strictly following ethical principles of research. Play2earn is clearly no longer "just a game" and it deserves our full attention in the future.


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  7. ("Illuvium - DAO Governance", 2022)
  8. ("Sky Mavis Raises ~$1.5M to accelerate the development of Axie Infinity", 2019)
  9. ("Merit Circle investments: maximizing treasury value", 2022)
  10. ("Axie Infinity Whitepaper", 2021)
  11. ("Uniswap Liquidity Plunges After UNI Rewards End", 2022)
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  14. ("Axie Infinity Whitepaper", 2021)
  15. ("How Uniswap works | Uniswap", 2022)
  16. ("Dealing with Slippage in Cryptocurrency", 2022)
  17. ("What is staking?", 2022)
  18. ("Axie Infinity Whitepaper", 2021)
  19. (Koffman, 2021)
  20. (Gilliam, 2018)
  21. ("Play-to-Earn is Big Business; Play-and-Earn will be Far Bigger", 2022)
  22. (Montagnani et al., 2022)
  23. (Chambers-Jones, 2014)
  24. (Holm & Mäkinen, 2018)
  25. (Lee, 2022)
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  27. ("Axie Infinity Live Player Count", 2022)
  28. (Pearl Li, 2022)
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  39. (Kenton, 2020)
  40. (Deloitte, 2022)
  41. ("The Axie Community Treasury & Progressive Decentralization", 2022)
  42. ("Yield Guild Games: Asset & Treasury Report --- September 2021", 2021)
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  46. ("Axie Infinity Whitepaper", 2021)
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  48. ("Marketplace Fee Adjustment", 2022)
  49. ("Breeding Fee Adjustment", 2021)
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  51. ("Dev Journal: Economic Balancing", 2022)
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  54. ("Dev Journal: Economic Balancing", 2022)
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