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Axie Infinity believes the ‘play-to-earn’ model is unsustainable. One horse racing blockchain game is doubling down on it.

April 16, 2022, 11:00 PM UTC

Since launching last October, the horse racing blockchain game Pegaxy has become one of the world’s most popular crypto games with hundreds of thousands of players and millions of dollars flowing into its platform each week. In the game, players race non-fungible tokens (NFTs) of horses, which have unique digital signatures on the blockchain and can retail for up to $100,000, against one another. But in building the game, Pegaxy’s Hanoi-based team didn’t take its cues from the Kentucky Derby or the Preakness Stakes. Instead, founders sought to capitalize on the breakout success of another Vietnamese company, Sky Mavis, which had developed a Pokemon-like battle game and ignited a boom in blockchain gaming, projected to be a $40 billion industry by 2025.

Sky Mavis’s game, called Axie Infinity, has drawn marquee investors to the space like Mark Cuban and Andreessen Horowitz. Pegaxy has emulated Axie’s play-to-earn model, which allows users to trade in-game winnings for real money, a feature that helped transform Axie Infinity into a full-time job for hundreds of thousands of people in the Philippines and elsewhere over the past year. But Axie’s founders recently determined the play-to-earn model that propelled the platform’s rise to be unsustainable and launched an update aimed at radically overhauling the game’s economy. The company now seeks to lure gamers who want to play purely for fun rather than to earn money. Pegaxy is not joining the pivot. Instead, the horse racing game is charting its own course, effectively doubling down on the play-to-earn model that Axie Infinity pioneered, then spurned. The two games’ conflicting outlooks reflect the larger debate over how companies will harness the blockchain—the technology currently used to race digital ponies and battle digital monsters—to shape the future of how the world plays, works, and conducts commerce.

The fallout of the debate will be particularly important in new Web3 hotspots like the Philippines and Indonesia, where crypto game earnings can substitute for real wages. Even as Axie Infinity is scaling back its ambitions, the upstart Pegaxy is going all in on Axie Infinity’s original vision, believing that it can—against all odds—create a blockchain game that can become a viable career path for potentially hundreds of thousands of more players in developing countries.

The guild model

Launched by Vietnamese startup Sky Mavis in 2018, Axie Infinity is a Pokemon-like game in which users battle their NFT Axies against one another to win Smooth Love Potion (SLP), an in-game currency. 

The game took off early last year. At its peak it had nearly 3 million daily active users, the majority of them in the Philippines and a handful of other developing countries where winnings could compete with local wages.

But Axie Infinity’s NFT characters, called Axies, became prohibitively expensive for many users when the game boomed in popularity. In the middle of last year, the three NFTs required to play the game cost new players $1,000. 

Enter the guilds. Blockchain ‘gaming guilds’ could assume the risk of buying expensive NFTs and lend them to players mostly in the Philippines, Indonesia, and other developing countries where income earned from playing the game was enough to live off of.

“We discovered that we could basically breed a lot of Axies and then lend them out to people,” Gabby Dizon, founder of Yield Guild Games (YGG), the world’s largest gaming guild recently told Fortune. YGG takes a 10% cut of player winnings, with 70% going to the players and 20% going to their direct managers. 

At the time, friends Ken Pham, a business consultant, and Steve Nguyen, a mobile gaming executive, were both working in Hanoi and closely watching the astonishing success of Sky Mavis. After “carefully studying” Axie Infinity’s gameplay and economics, they thought they could innovate on top of its model. In Axie Infinity, ‘managers’ are the NFT owners who lend out NFTs to ‘scholars’ who play the games. But the scholars and managers have discussions and set the terms of their relationships in chatrooms and social media platforms outside the game itself. Pham and Nguyen saw that some scholars complained about getting scammed or not being paid when managers lent them NFTs, and believed that the informal nature of scholar-manager relationships in Axie Infinity put scholars at risk of exploitation. Axie Infinity says there are a number of “very convincing” scams on its platform and urges players never to share their crypto passwords with anyone.

Pegaxy made it possible for scholars to directly rent NFT horses from managers within the game so developers could ensure that managers could not take advantage of scholars. “That is the most important thing we did,” says Nguyen. 

Screenshot of Pegaxy

The innovation proved a massive success. After launching the game in October 2021, Pegaxy NFT horses, or Pegas, were selling for over $2,000 each by February, up from $100 to $600. The value of both of Pegaxy’s in-game currencies Pegaxy Stone (PGX)—used to buy NFT horses—and Vigorous (VIS)—doled out to race winners—shot up 500% and 400%, respectively, from November 2020 to February 2021. And scholars and guilds who previously only focused on Axie Infinity flooded into Pegaxy too.

Pegaxy says that after launching from scratch last year, the game’s user base has ballooned to 170,000 daily players. Pegaxy’s discord server also has 145,000 users that actively participate in the online chatroom about the game while over 100,000 users follow Pegaxy accounts on platforms like Twitter, Instagram, and Facebook. The game became particularly popular among top crypto gaming guilds like Good Gaming Guild.

“Strong confidence in the game’s growth caused [Pegaxy’s] market cap to skyrocket,” says Seth Zhuo, a research analyst at blockchain analytics firm Nansen. The value of the game’s governance token Pegaxy Stone reached $45 million in early February. The game’s initial success was a boon to investors like crypto exchange Crypto.com, which poured $2.5 million into Pegaxy when it launched last October.

Play-and-earn?

After Axie Infinity’s booming success last summer, the game hit a wall last fall as the influx of new users slowed.

The value of its in-game currency SLP has dropped by 95% since last July. The crash in Axie Infinity’s economy is part of what convinced Sky Mavis that its initial play-to-earn model was no longer sustainable. This week, fresh off a hack in which a user stole over $600 million from the firm, Axie Infinity launched ‘Origins,’ an update to the game aimed at attracting users who are interested in playing the game for fun, not just to make money. Pegaxy has gone through its own boom and bust cycle but reached a different conclusion.

Since February, the floor price of NFT Pegas has fallen from roughly $2,000 to $50. The price of VIS, meanwhile, is down 97% from its all-time high set in early February. Fortune spent 40 PGX ($6.60) to rent two horses for a day in early April and participated in 44 races that each took around 30 seconds each. To “race” a Pegas, a user presses a button and watches the small NFT horses run from one end of the screen to another. In total, Fortune won 632.2 VIS or $4.30. Had Fortune played in early February, those winnings would have been worth $159.30.

Wilton attributes Pegaxy’s meteoric rise and fall to “hype and speculation” and acknowledges Pegaxy was not ready for the flood of new users. He believes that at a certain point, people were coming not to play the game but to trade the NFT horses as a speculative asset. And because many of these buyers were not interested in the game, they were quick to sell off NFT holdings when the market started to decline, exacerbating Pegaxy’s economic crash. “Unfortunately, we were unable to develop the game quickly enough to keep up with the population growth,” he says.

Axie Infinity says that with its new update the game has become ‘play-and-earn’ instead of ‘play-to-earn.’ But Pegaxy believes the play-to-earn model remains viable.

“Axie is taking one direction… we’re taking a bit of an opposite direction,” Wilton says. The main difference, he says, is that Axie Infinity wants to focus on making its game as fun as possible and attract users that do not necessarily expect to win money. Pegaxy, on the other hand, is more focused on ensuring that new users feel that they can continue to earn money on the platform.

Pegaxy’s economic focus will involve further integrating gaming guilds into Pegaxy’s platform and tweaking the game’s reward structure to keep it financially attractive for new players. In any case, Wilton concedes it would take Pegaxy five to ten years make a blockchain game that could match the graphics and gameplay sophistication of leading video game titles.

Pegaxy recently launched a new 3D version of its game, but it was not working when Fortune logged on. Fortune used the older 2D screen, which features basic graphics of horses slowly galloping across the screen. Even those graphics were glitchy. As of now, the game requires no skill from players; race outcomes are determined by an algorithm.

Wilson explains that Pegaxy is grounded in the crypto world, where speculating on unstable assets is integral to the ecosystem, as opposed to the gaming world, where people are seeking entertainment.

“The path of innovation is to play with money because that’s what those people with money in crypto want to do,” he said.

However innovative, Pegaxy may struggle to overcome structural problems of the play-to-earn space, says Lars Doucet, an independent game developer and consultant for Naavik.

“The fundamental contradiction of ‘play-to-earn’ is that if total money out exceeds total money in, there is no way for the system to be sustainable, full stop,” Doucet says. “Anyone who purports to have a sustainable ‘play-to-earn’ system either doesn’t understand this or is simply using a different definition of ‘play-to-earn.'”

Axie Infinity co-founder Jeff Zirlin says the play-to-earn model is unsustainable because eventually a game will run out of new users expecting to make money. “The reality is that there have to be people that are spending money to subsidize others who earn,” Zirlin told Fortune, “We haven’t really created a magical new system that can defy the laws of economics.”

Wilton acknowledges that Pegaxy’s model might not work, but stressed that blockchain gaming is a new industry and no company has found an ideal model for making a successful and sustainable game. “We are building in a direction that people may not agree with… but it’s an experiment, it hasn’t been done before,” Wilton says.

Each day, thousands of users in countries like the Philippines and Brazil are signing up to play Pegaxy for the first time with the hope that they can make money from the game. Some of these players may, indeed, win money from their efforts, but Doucet argues that many players will lose more money than they put in.

Everyone wants to be able to withdraw money from a “fixed pie,” says Doucet. And even in the buzzy new world of Web3, there’s only so much money to go around.

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