In this new generation of apps where blockchain meets video games new vehicles for investment arise that use NFTs in a novel way. Axie Infinity has been at the forefront of the movement with a staggering growth of its user base and volume transacted in its marketplace.
In a previous article I did an analysis of Axie Infinity’s blockchain tech stack to understand how robust their technology is before even considering a credible investment opportunity. You can find a link to that article here. Today I’ll focus instead on analyzing its investment potential.
Today there are three ways to invest in Axie Infinity: speculating with their ERC20 tokens, buying their capped NFTs (Land) or buying their non-capped NFTs (Axies). That last category is in my opinion the most interesting one at the moment as it allows for a passive and an active investment model.
Non-capped NFTs
NFTs are normally treated as collectibles where it’s value is derived from its scarcity. CryptoPunks is probably the most well known project where 10,000 punks were created a couple of years ago and given away for free for anyone who wanted to claim one. As of today the most expensive punk has been sold for $7.5 millions. This is an example of a capped NFT.
Other projects like CryptoKitties followed a different recipe and instead of having a limited number of NFTs its supply grows over time. In the case of CryptKitties the way to increase the supply is by “breeding” two kitties to create a new one that inherits some of the properties of its parents (eyes colour, mouth shape, fur type, etc.). CryptoKitties became so popular in 2018 that it created a bottleneck on the Ethereum network that was not able to handle the volume of transactions generated by the dapp. This is an example of a non capped NFT.
Axie Infinity is heavily inspired by CryptoKitties. Each Axie is an NFT that belongs to a certain class (beast, plant, bug, etc.) and has (aside from his body) 6 body parts: eyes, mouth, ears, horns, tail and back. The combination of the class and the body parts makes the Axie to have a unique look.
Figure 1. Example of an Axie’s body parts as seen in the Axie Infinity marketplace
So far this is very similar to CryptoKitties but Sky Mavis (the creator of Axie Infinity) added another dimension to these NFTs. You can use a team of 3 Axies to play against NPCs or other players in a pokemon style game to earn Smooth Love Potions (SLP), their in-game ERC20 token. The combination of the class and the body parts not only makes the Axie to have a unique look but also defines its stats (health, speed, etc.) and the cards that you can use during a battle. I don’t want to get into the details of the game mechanics, I just want to drive the point home that the combination of all these things makes each Axie “almost” unique. I say almost because it’s possible, although rare, that two Axis have the same characteristics.
Axie Infinity’s Marketplace
Looking at some of the stats of Axie Infinity’s marketplace where Axies are sold and bought we can get an idea of how successful this game is. Just in the last 24 hours more than 50,000 Axies have been sold for a total of almost $30 million dollars. Since its inception, $1 billion dollars worth of Axies have been sold. The revenue that that game is generating is miles ahead of any DeFi project and Ethereum itself as can be seen in figure 2.
Figure 2. Top dapps and blockchains based on cumulative protocol revenue in the past 30 days (source)
The entry cost to buy an Axie is around $350 although to buy a competitive one you are looking at around $600 per Axie. To buy a one of a kind Axie the price tag goes to $150,000 and up. Keep in mind that to play the game a person will need to buy at least 3 Axies for a minimum investment of around $1,000 for the most basic team.
Breeding Axies
Figure 3. Example of breeding Axies.
As mentioned before, one way to use the game as an investment is to breed Axies and sell the offspring for a profit in the marketplace, this is known as a “breeding farm”. An Axie can be bred at most 7 times and each time you’ll have to pay an amount of SLP and AXS as a fee. The amount of AXS required is fixed at 4 but the amount of SLP increases as the number of times an Axie has been bred as shown in figure 4.
Figure 4. Amount of SLP needed to breed Axies (source)
At the current price of $42.11 per AXS and $0.18 per SLP we would need to pay $195.44 to create a new Axie that can be sold for around $600 (if of high relative value) for a profit of around $400 minus Ethereum’s gas fees to transfer SLP and AXS over to Ronin (if that last part doesn’t ring a bell go read my previous article where I talk about the Ethereum to Ronin bridge). The table below provides an overview of the breeding costs using today’s SLP and AXS values.
| Breed Count | Cost (USD) |
| 1 | $195.44 |
| 2 | $222.44 |
| 3 | $249.44 |
| 4 | $303.44 |
| 5 | $384.44 |
| 6 | $519.44 |
| 7 | $735.44 |
Table 1. Cost of breeding and Axie
If we assume that the offspring of two high end Axies creates another high end Axie that can be sold for a similar price as their parents ($600), we can conclude from the table above that breeding an Axie for the 6th and 7th time is not profitable. With that in mind, we can calculate the return on investment (ROI) assuming that we are going to buy two high end Axies as parents and breed them 5 times. After that we are going to sell all the offspring and parents in the marketplace. Keep in mind that the parents will have a reduced value in the marketplace as they are being already bred 5 times. The lowest price in the marketplace today for such Axies is $400.
ROI = 100 * Profit / Cost
Cost of buying two virgin high end Axies = 2 x $600 = $1,200
Cost of breeding them 5 times = $195.44 + $222.44 + $249.44 + $303.44 + $384.44 = $1,355.20
Total cost = $1,200 + 1$,355.20 = $2,555.20
Revenue of selling all 5 offsprings = 5 x $600 = $3,000
Revenue of selling the parents = 2 x $400 = $800
Total revenue = $3,000 + $800 = $3,800
Profit = $3,800 – $2,555.20 = $1,244.80
ROI = 100 * $1,244.80 / $2,555.20 = 48.7%
That’s a pretty high return on investment in just 5 days! (because of the cooldown time). In other words, you can easily make $1,244.80 in profit every week by just breeding Axies.
Breeding Farms
The numbers shown above are incredible from an investors point of view but that’s just the tip of the iceberg. Turns out that there’s a method that allows you to recover your investment in around month (100% ROI) by setting what the community calls a “breeding farm”.
To understand how a breeding farm works you have to keep in mind that you can’t breed an Axie with any of their offspring or any of its siblings. But weird enough you can breed an Axie with an uncle or a cousin. So for this method to work you’ll have to buy three Axies instead of just two and follow the breeding combination shown below.
Figure 5. ABC breeding method
Well, well, well. We have now turned into a Central Bank able to print money at will. With just 3 Axies we can keep creating as many Axies as you want with the only limitation of the cooldown time waiting for the eggs to hatch. It’s crazy, I know.
The Risk of Overpopulation
The investment opportunity is so good that the population of Axies is exploding in the marketplace. I haven’t been able to find statistics of how many new Axies are created per day but if you go to Axie Infinity marketplace today, you can see that the total amount of Axies listed there (not all of them for sale) is close to 3.7 millions. That’s a huge number for an NFT project. Not only that, from an article of Axie Infinity official blog (The Lunacian) dated on June 29th 2021 the population at that time was “only” 1 million. So in about a month the population almost quadrupled!
How is it possible that the price of an average Axies hasn’t collapsed with such explosive growth? The reason is that the growth of the user base is also exploding as shown in the figure below.
Figure 6. Growth of user base and transaction volume in the marketplace
During the same time that the Axie population grew from 1 million to 3.7 millions, the user base went from 250,000 to 1,000,000 (figure 6 is slightly outdated), that’s also a 4x growth! Considering that you need at least 3 Axies to play the game, having a ratio of 4:1 Axies per user is still a healthy number.
While the population of Axies will continue to explode given how profitable the investment is, there’s a risk that if the user base growth starts to slow down the market for Axies might crash. From purely an investment perspective making money by breeding Axies can be considered a Ponzi scheme but because it is first and foremost a game, Sky Mavis wants the population of Axies to grow to keep up with the user base expansion in order to keep the cost of entry in check. The average cost to create a team to play the game is already prohibited for most gamers and it’s in the community’s best interest to not allow the average cost of an Axie to keep ballooning, otherwise the number of investors will outpace the number of gamers and the whole thing stops making sense.
Conclusion
Axie Infinity as the first successful blockchain game is presenting us investors with a whole new catalog of investment opportunities that outpaces the potential profits of practically anything else out there. There’s a risk that the user base growth might not keep up with the growth of the asset but it’s still early days for the game and it’s very likely that the user base will keep increasing.
Sky Mavis is aware of the risk of overpopulation of Axies but it’s not intervening to keep the cost of entry low. In the future they have in their roadmap the introduction of an Axie “sink” as part of the new expansion of the game experience that will help to balance the population of Axies and thus keep the price somehow stable.
I’ve only covered one way to make money out of the game but there is another very interesting option known as “scholarships” that I’ll analyze in a future article.
Lo leeré inmedatamente. Saludos