Revisiting Axie Infinity

Hi Everyone. Welcome back to Naavik Digest. Six months ago, we launched our premium research portal, Naavik Pro, with our inaugural essay on Axie Infinity. Since then, there has been so much development, change, and discussion around blockchain gaming generally and Sky Mavis specifically that we decided to revisit our research on Axie Infinity and provide an updated analysis.

We’re excited to share this detailed non-paywalled Naavik Pro essay with you below and would love it if you shared it with your friends, colleagues, and whomever else might be interested in reading. As a subscriber to this newsletter you can get immediate access to the full PDF, but if you share please use this link to the website version. Happy reading!

Roundtable: The Snowball Changing the Games We Develop

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#1: Axie Infinity (Part 2): Redemption or Ruin?

This essay, spearheaded by Lars Doucet, was first published in Naavik Pro. If you’d like to regularly receive deconstructions and market updates like this, make sure to sign up or request a demo.

Axie Infinity, the former poster child of blockchain gaming and the game that coined the term “Play to Earn,” has fallen on hard times as this “digital nation” reels from a recession prompted by declining player growth and plummeting token values. After the initial troubles began, North Korean hackers stole over half a billion dollars in crypto assets from the bridge that connects Ronin, the game’s private blockchain, to Ethereum. This was soon followed by a sector-wide crypto crash, a major fall in stock markets, and growing fears of a coming recession in the global economy.

Before we unpack all that, let’s take a step back. We first detailed how Axie Infinity’s developer Sky Mavis achieved fame and fortune in Naavik’s inaugural blockchain game deconstruction in November of last year: Axie Infinity: Infinite Opportunity or Infinite Peril? Sky Mavis was still riding high at the time but was beginning to see signs of slowing growth. We concluded our piece with this:

Axie Infinity’s business model, for the moment, depends on continued growth in its user base and continued fresh money entering the system to prop up the value of Axies, $AXS, and $SLP. The pace of that new user growth is also critical, because any slowdown in the breeding and selling of Axies to new players will lead to a decline in revenue. We think this outcome is likely over the coming months barring any unforeseen spike in new users. In Sky Mavis’ own words, “this is unsustainable.” Of course, as Keynes probably didn’t say, “the market can stay irrational longer than you can stay solvent.”

What really matters for Axie Infinity’s future is whether Sky Mavis can provide credible future plans for new features that will ground the game in a more stable source of recurring revenue that meets the expectations of all stakeholders. This hope squarely rests on the potential of the land-centric user-generated content efforts (some players need to be willing to spend without expecting a financial return), but we’re still hesitant to assume that these particular plans will lead to outsized, sustainable success. Fortunately, it’s relatively early, and there’s still time to tweak certain economic flaws and re-optimize upcoming features for greater success.

The greatest risks are two-fold. First, there’s the risk that the game’s player base will remain firmly within the “play-to-earn” crowd without attracting significant numbers of players happy to simply play the game for fun and put new money into the system without expecting a return. So far the game has attracted little attention in the developed world outside of crypto enthusiasts and investors, likely due to its particularly high barriers to entry. Second, we’ve yet to see how upcoming features will bring more stability to the economy and recurring revenue to Sky Mavis / AXS holders. If this isn’t resolved, the inherent unsustainability of the current model will eventually show its face and lead to economic turmoil. If it is resolved, however, exponential upside remains.

The only resource Axie Infinity lacks is time. Its meteoric growth has brought with it meteoric expectations, and the entire blockchain gaming sector is watching. Sky Mavis’ core task is to keep hope in a sustainable future alive with clear, consistent, and timely messaging. And then, it must deliver the goods.

That was more than six months ago. Since then, Sky Mavis has released a new Free to Play version of their game titled “Axie Infinity: Origin” (For the sake of clarity we will refer to the original version of the game simply as “Axie Infinity”, and the new F2P version as “Axie Origin”). They have also revealed detailed new plans for achieving a sustainable and flourishing economy that goes well beyond a single game.

Axie Infinity is a game of particular interest given its status as the flagship blockchain game and its deep ties to the most prominent investors and yield guilds in the space. Our goal is not only to evaluate Axie Infinity’s fortunes and available choices, but also to learn from this highly salient case study so that future projects — including those by Sky Mavis — can best learn from its experience. As always, our analysis flows directly from the available data, and our sincerest wish is to help each project move towards constructive and successful solutions.

Let us now see if Sky Mavis’ efforts have been sufficient to overcome their challenges.

Read The Full Deep Dive

#2: Weekly News Roundup

Facebook Gaming Teases Crayta: UGC platforms are a notoriously hard and competitive space to develop in, but FB Gaming has started making in-roads, with the company’s latest announcement being Crayta, a metaverse-adjacent UGC platform. Players can build, create, and share their games with friends. Crayta comes from Meta’s acquisition of Unit 2 Games earlier last year, and touches on the company’s core values around connectivity and digital experiences. The browser-based nature of the platform harkens back to Meta’s old roots in browser-based F2P through games like Farmville (except development is now in-house). With VR-based Horizon Worlds having reached 300K users, this is a bet that FB Gaming can launch a new platform with a bigger player base to build off of.

Netflix Games Reaches 13M Downloads: In my opinion, this is perhaps one of the crazier stats of the past few weeks, but Netflix announced it had 13M downloads across its suite of games. It’s no secret that the company has been aggressive in building its team to launch these games, even announcing a few acquisitions along the way. While 13M downloads is a relatively small number compared to the global subscriber base of 220M, the strategy of providing more value to the subscription seems to be working to some degree (at least on the downloads front), and time will tell if they can leverage their IP & content library to launch a compelling slate of games.

US Game Spending Declines: In an insightful thread on video game consumer spending, Matt Piscatella writes “May 2022 consumer spending across video game hardware, content and accessories fell 19% when compared to a year ago, to $3.7 billion. This is the lowest monthly spending total the industry has achieved since February 2020 ($3.5 billion).” Video game spending is still up from pre-pandemic levels and this past month’s decline reflects broader macro conditions around consumer spending.

Playful Studios Raises $46M: While venture funding announcements are a lagging indicator of what’s happening in public markets, it was still surprising to see a $46M pre-alpha funding announcement for Playful Studios’ upcoming game, Wildcard. Paradigm led the round on largely a team bet given that founder Paul Bettner is deeply experienced (ex-Age of Empires & Words with Friends). According to VentureBeat, the game seems to be an auto-battler with MOBA elements — this is a crowded space with most games not having the DAUs to support the genre, so it will be an interesting one to track especially in context of Paradigm’s previous investment in Parallel, another NFT TCG. Important to note is that there has also been more VC market tepidness since crypto markets have tanked. This may be one of the last massive pre-launch rounds we see for a while in this space.

In Other News…

Funding & Acquisitions:

Immutable launched a $500M venture fund. Link
Playful Studios raised $46M for The Wildcard Alliance led by Paradigm and GGP. Link
Animoca Brands acquired TinyTap for $39M. Link
Clockwork Labs announced a $22M Series A led by a16z (crypto & games, an interesting firm-wide strategy to say the least) for its upcoming MMO, BitCraftOnline. Link
Odeeo raised $9M in a seed round led by Play Ventures. Link
Earth From Another Sun raised $4.5M. Link
Hypemasters raised $3.25M. Link

Business:

Bytedance is making more concerted moves into VR. Link
Google sent in-house game development to other studio when it downsized Stadia. Link
Diablo Immortal has made over $24M in its first two weeks. Link
Apple Music and Apple Arcade collectively are expected to earn $8.2B by 2025 (unclear what the breakdown is). Link
Facebook Gaming announced Crayta, a browser-based UGC platform. Link

Culture & Games:

Xbox’s game lineup over the next 12 months. Link
Compare the above with PlayStation Plus’ Premium Games List. Link
Twitch is changing its ad programs to benefit streamers, 55% payout on each ad. Link
Demos on Xbox & Cloud Gaming Updates. Demos | Cloud Gaming
Netflix games reached 13M downloads. Link