a16z Partner Dialogue with Axie Infinity Co-Founder: Games are the Key Pathway for Hundreds of Millions of Users to Enter the Crypto Space

Source: Zoran Basich Blog

Original Title: "Zoran Basich: 'Play-to-Earn' and the Broader Trends in Web3"

In today's podcast, we will discuss an emerging gaming model: Play-to-Earn, where players can earn money based on the time and effort they invest in the game. "Play-to-Earn" is also part of larger trends—the relationship between players and platforms is changing, new incentives for participating in blockchain-based networks are emerging, and a new era of the internet, Web3, is on the horizon.

The most popular "Play-to-Earn" game currently is Axie Infinity, operated by a Vietnamese company called Sky Mavis. Players in the game earn NFT digital pets called Axies and battle with teams of other Axies (thus earning SLP rewards). These Axies can be bred and sold using the in-game currency SLP, which can be exchanged for traditional fiat currency.

You can think of this game as Pokémon on the blockchain, with a built-in social network and real economy, and even companies formed around the game (like Yield Guild Games) that help players get involved and lend them money to start playing. Since its launch in March 2018, Axie Infinity has generated over $3 billion in total sales, with much of its early growth coming from the Philippines.

Today, our guests are Jeff Zirlin, co-founder of Sky Mavis; Gabby Dizon, co-founder of Yield Guild Games (YGG, a guild organization that provides resources for blockchain game players to start playing); and Arianna Simpson, a general partner at a16z. They will discuss with a16z's Zoran Basich the larger technological trends driving the rise of the "Play-to-Earn" model, where it first gained popularity, the role of community, and the challenges involved, including the challenges of starting to play and scalability, as well as the economic sustainability of this model.

The following content does not constitute investment advice.

The Start of Axie Infinity & "Play-to-Earn"

Jeff Zirlin: Many of the early members of the Axie community and founders came from the CryptoKitties community, where we understood that launching new NFTs had to be tied to actual work and effort in some way. This fundamentally prevents malicious inflation. So in the first iteration of the Axie battle system, we had experience points that could be used to breed Axies. Then we had the idea that since many players were asking to turn these experience points into tradable tokens, we tokenized the experience points.

After that, we saw our players creating a liquidity pool on the decentralized exchange Uniswap. Then we realized that you could actually calculate the expected hourly income from playing the Axie game because this liquidity pool guaranteed liquidity.

So, I think at that moment we saw the potential of this game. In a post we published in January 2020, we stated that we saw the intersection of NFTs and DeFi, which is creating a model we call "Play-to-Earn." I believe this may be the first time this term was used, at least in a non-speculative way.

Zoran Basich: A key point to note here is that people have to pay a significant amount of money to start playing this game—they need to download a crypto wallet and purchase three Axies, which can cost over $1,000 and the price is constantly fluctuating. Gabby, you witnessed this in the Philippines; what did you see from this economic model?

Gabby Dizon: I have been working in the gaming industry for nearly 20 years and joined the Axie community as a player at the end of 2018. What I saw last year was that people in my home country, the Philippines, began to discover and play Axie as a way to escape the economic hardships brought on by the (COVID-19) lockdowns. These players were not crypto enthusiasts but ordinary people stuck at home without jobs.

Thus, we had the idea of creating a guild as a way to bring people into the "Play-to-Earn" world, by launching a scholarship program to provide opportunities for people around the world—not just in the Philippines, but also in Southeast Asia, India, Latin America, and other countries—to play the game and earn money without having to bear the upfront cost of buying these Axies.

What we did was collectively invest in many of these assets as players, and then build communities around these different games, allowing people to participate in these networks, so that the barrier of having to buy three Axies to enter a game like Axie Infinity was no longer an obstacle.

Conditions for Growth - The Philippines and Beyond

Zoran Basich: You mentioned the growth of "Play-to-Earn" games in regions like the Philippines. What conditions drove this growth? Why did the spark occur there? What insights can this provide for future community building?

Jeff Zirlin: I think there are some unique things related to the Philippines. Filipinos love mobile gaming, and there is a relatively high awareness of crypto. Information and trends can spread very quickly here. Filipinos have traditionally been early adopters of many social networks and platforms (like Facebook). Particularly in the Philippines, I think there are many special circumstances that make it essentially ahead of other countries in the world, but I do believe it is only about 9 months ahead of other emerging market economies.

How "Play-to-Earn" Reflects Broader Web3 Trends

Zoran Basich: So if the "Play-to-Earn" model is indeed spreading and continuing to grow, it means that something bigger is happening—what specifically? What kind of transformation are we actually witnessing?

Arianna Simpson: We believe that those who create value should be able to participate in a beneficial way. This is the core idea of Web3. People are making a living through Axie, thus being able to ensure that the platform itself does not retain all the value, but rather returns value to the community, creators, and those who are truly responsible for creating value. I think this is an unstoppable movement.

Jeff Zirlin: One framework we can consider is, for example, who are the intermediaries that can be removed? How is the value extracted by these intermediaries shared with the actual users and stakeholders of the platform? In the case of Axie, I think the current situation is that app stores and game publishers have been excluded, which typically take over 50% of the revenue generated by games. We have removed them. We do not use them. We are sharing this value with those who are truly driving the growth of our network (i.e., the community).

How Sustainable is "Play-to-Earn"?

Zoran Basich: Okay, so people need to spend money to enter the game, they interact with their characters, and they compete with each other to earn rewards. But how do we understand its sustainability? How do you view its underlying economic model?

Jeff Zirlin: One way to look at this model currently is that Axie is somewhat dependent on growth, much like any emerging market economy. Currently, Axie is somewhat reliant on capital inflow. But in the long run, it is very important for players to spend in the Axie economy because it means they find the game really fun, or they see the opportunity to use money to gain rights or respect. The more Axie resembles a real social network or a country, the more opportunities there are for this type of value exchange. We defined Axie as a social network and a game early on. This is becoming increasingly true as we have achieved many things, such as our Discord being overwhelmed.

Zoran Basich: What are the key factors that make "Play-to-Earn" sustainable? For example, how do you view the potential capital inflow and the limits of participation?

Arianna Simpson: In many ways, these "Play-to-Earn" economies will be similar to real-world economies. They are very complex, and I think continuing to manage capital, token supply, and all the dynamics in these metaverses will be a real challenge.

In my view, the most critical point is to ensure that different groups of players continue to participate for different reasons and derive different values from it. So, people might purely be there because they enjoy playing the game, or because they gain a lot of personal satisfaction from guiding others. In many cases, it could be for economic reasons. There are many reasons why people want to play this game and integrate into the community, but as long as players who have invested additional capital can derive other enjoyment from it, that’s fine. This is no different from the real-world economy. For example, I might be wealthier, and I might pay someone to do something I don’t want to do, or someone might pay me to do something they don’t want to do.

So, as long as there is a strong ecosystem of participants, I think this will actually drive things forward.

Zoran Basich: What is the balance between those who are trading in this economy and those who are extracting funds from it? For example, some players will convert game assets into fiat currency because they need to pay bills, right? So they need to make choices about how much to invest in the system and how much to take out. What are the trends in this? What impact does this have on the business model?

Jeff Zirlin: In terms of capital flow, we see that the funds deposited into our ecosystem far exceed the funds withdrawn. Only 4% of Axies are sold on the market. So, I think this indicates an emotional connection, and that people are not just in it for the money. This also provides them with new opportunities, social networks, and a lot of fun.

So, I think right now, during this rapid economic growth and the high spirits of people, it is easier to balance the economy. In the long run, it is important to ensure that joining this community and being part of the community is very enjoyable, and that the game is also very enjoyable.

The Role of Community

Zoran Basich: But what makes people feel like they are part of a community? There should be some greater sense of belonging, not just "Oh, I want to make some money," right?

Jeff Zirlin: Exactly. I think this can be boiled down to a shared economic alliance, but it also includes a cultural alliance. When new members join, they learn about this, and at the time they join, they have actually adopted some of the ideas themselves. So, I think this is very important. This community is excellent at educating and guiding. 80% of our users come from referrals.

Arianna Simpson: I think this shows the enthusiasm people have for what is happening, whether in offline settings (the attendance at related meetups is very high) or in digital spaces (for Axie, this is on Discord, Substacks, etc.). So, this community has a stickiness, where people feel this community is theirs, and they are benefiting from being members of this community, rather than having others extract value from them.

Zoran Basich: But there seems to be a paradox here. One characteristic of traditional systems (whether financial systems or gaming systems) is that it is difficult to transfer accounts from one bank to another, or you cannot transfer goods from one game to another. But crypto has changed that, making assets easier to carry. So, isn’t it easy for some equally appealing games with equally cute characters to emerge, and then your community might shift over there?

Jeff Zirlin: What we are creating is not just a gaming community; in many ways, it is like a realm where people share common cultural values. We have a very deep economy. Therefore, I think for this type of network, uprooting a community and transplanting it into a new universe where they have no stakes is much more difficult. We are seeing players in the real world forming the Axie community, where everyone in their town or city is playing Axie Infinity. It has network effects, right? The more people hold Axie tokens, the more people will hold Axies NFTs; the more people own land in this universe, the stronger the economic and social relationships between them will be.

Gabby Dizon: Yes. A significant feature of the transition from Web2 to Web3 is that communities are selectively joined, and communities form around specific assets or specific game universes by allowing people to share economic ownership and have a sense of belonging. People stay in this community because they choose to stay here, and they help build the culture of the tribe. There are shared economic incentives and cultural incentives within the community. But if people want to leave this network and join another network, no one is stopping them from doing so.

Zoran Basich: Speaking of user choice and user behavior, how is this changing? Since YGG is funding players and bringing them into the game, helping them start playing, Gabby, you have a close view of this. Are there one or several different behavioral patterns evolving here?

Gabby Dizon: We (YGG) see ourselves as a necessary layer that brings people from the real world into the metaverse, especially for those who cannot afford the upfront costs. But once they are involved and have income, we encourage them to transition from players to investors.

So initially, people were earning money by earning SLP tokens. They exchanged them for fiat currency to support their families and pay bills. What we are seeing is that when they have some surplus income, many of them are actually changing their behavior patterns for the first time in their lives: people are adopting a more investor mindset. Now they might think, "Should I buy Axies for my family so they can start earning money too? Should I buy the first piece of land on Axie Infinity and become a virtual landowner?" and so on.

Scalability Challenges & Ronin

Zoran Basich: Jeff, you mentioned CryptoKitties earlier. This is a prominent example of a game that achieved mainstream success before Axie. It congested the Ethereum network for a while, right? So what challenges does Axie face in terms of growth and scalability?

Jeff Zirlin: In our ecosystem, there are many small, low-value transactions that are crucial for our user base in emerging markets. But due to the high fees on the Ethereum network, these transactions are basically unaffordable on Ethereum, and clearly, we are in a bull market, which coincides with the rising gas costs on Ethereum. The success of the Ethereum ecosystem and all these DeFi applications has actually stifled our growth, pushing our users out. We reached a point where we really needed to migrate most of our transactions to our own infrastructure.

In April of this year, we launched Ronin, which is our Ethereum sidechain, and we added this critical infrastructure to the equation, enabling our growth. Before Ronin was launched, we had about 38,000 daily active users; now, we have reached 2.4 million daily active users.

Zoran Basich: Specifically, what does the Ronin sidechain do for you? What potential does it unlock?

Jeff Zirlin: Ronin allows for the proliferation of this scholarship model because there are many transactions involved when people run scholarship programs. Therefore, breeding Axies, sending Axies to different accounts, claiming in-game rewards, etc., all these on-chain transactions would be very costly on Ethereum and usually require waiting for a while; whereas on Ronin, these transactions are very cheap, currently free, and much faster.

That’s why we call it Ronin. Ronin refers to a masterless samurai. It’s all about taking our fate into our own hands; we can be the ones who determine our growth path, rather than being passive recipients of the Ethereum market conditions and gas prices.

Arianna Simpson: I think this is a very important story. If they hadn’t done this, I think while the game would clearly continue to grow, it would be limited as it was before. So once the infrastructure is in place, it unlocks incredible potential.

Entering the Game

Zoran Basich: Another challenge is entering the game, specifically the steps required to start playing. You have to download multiple wallets, and obviously, you need to pay some upfront costs. On one hand, this shows how attractive this game is for those willing to navigate these steps, but on the other hand, you want it to become simpler.

Jeff Zirlin: Starting to play Axie is still very difficult. Therefore, many of our development roadmaps are aimed at reducing these barriers. Specifically, for example, if you are interested in Axie and want to play the game, you have to figure out which Axies you really want to buy. This may involve a lot of research online, perhaps watching YouTube tutorials. You are basically buying characters for a game you have never played before.

We will be releasing an upgraded battle system, one feature of which will be a demo tutorial, allowing people to download Axie and receive a free team of Axies to understand the game before making any economic decisions, figuring out if they really like the gameplay and the community. Therefore, we think this will be an important phase.

Gabby Dizon: You know, this is where the community comes into play. What I love about it is that it replaces intermediaries like Facebook and Google with a community-based structure, bringing people into games like Axie, teaching them how to play, how to earn money, and how to use cryptocurrency. To me, this is like Web2 simplifying people into statistics, just about daily active users; whereas in Web3, this community-based growth rewards individual users, creating content in the community and learning how to play to earn, and we see all these people improving their lives through earning money, which I think is really meaningful.

"Play-to-Earn" and the Future of Work

Zoran Basich: The concept of work is very important here. I mean, so far, this mainly involves players and those funding these players. But when you look to the future, what new professions do you foresee? Whether specific jobs or categories of work.

Jeff Zirlin: Axie players come in many different types: there are competitive battle players, collectors, scholarship managers, and scholars, as well as some long-term holders of Axies, content creators, and educators. Additionally, many players also play multiple roles at once.

I think what we will see is that at least within the Axie ecosystem, different types of players will begin to connect or map to different professions. We are already starting to see the rise of competitive Axie players who can make a living by winning tournaments or climbing leaderboards.

I think we will also see the emergence of politicians in the Axie world, such as people leading councils who will consider the best use of funds and may also propose governance suggestions. You might have people focused on collecting or harvesting specific things. This could be like a farm worker, for example, going to harvest resources on Axie land. I think this is a prototype we have seen in the past, but I think it has never really exploded; I think it is reaching a breakthrough moment with the rise of Axie and YGG and similar organizations.

Zoran Basich: We have heard a lot about Web3 and the metaverse, and other trendy terms, all somewhat revolving around the idea of our lives increasingly being online. Do you think these "Play-to-Earn" trends transcend gaming or work and become part of our lifestyle?

Gabby Dizon: Yes. The intersection of this crypto and creator economy, along with trends about the future of work and where people are heading in the metaverse, is actually one of the things that excites me the most. So, when you see these games in the virtual world, I think it will not just be the games we see now. In the virtual world, people will be able to go to banks, interact with some DeFi applications, and do what we consider work, but in these virtual worlds that look like games. Therefore, I think work and play will increasingly merge, and we will use cryptocurrency as a means of exchanging value, but they won’t necessarily be the games we know today.

Games as a Gateway to Crypto Adoption

Zoran Basich: I’m curious about your views on the overall adoption of cryptocurrency—many people are still skeptical about it. Overall, what does "Play-to-Earn" gaming mean for the adoption of cryptocurrency?

Arianna Simpson: Games will be a key pathway for hundreds of millions of users to enter the cryptocurrency space in the future, because historically, participating in the crypto space has not been easy; the barriers to entry have been high, and the technical hurdles have been quite significant. Moreover, it can be a bit intimidating. It’s about real money. Games provide a more friendly and approachable experience for entering this space. You have these cute digital pets, and you can interact with other players. We have discussed the real sense of community. So this is a much more accessible way to enter this space. Therefore, we see players potentially entering this space through a game, and once they have a wallet, they start experimenting with other Web3 products and experiences, and from there, they move on to broader horizons.