Perhaps the most intriguing aspect of blockchain games for me is that they might be the embodiment of the metaverse, digital nations with citizens, government, jobs, investment opportunities, policies and even taxes. Granted, the only blockchain game that I have explored so far is Axie Infinity but the more I learn about it the more evident the similarities with nation states become.
My goal with this article is to discuss the similarities that I’ve seen between blockchain games and nation states in areas like government, monetary and fiscal policy, transparency and demographics. For each category I’ll be assessing how close or far Axie Infinity is to an ideal end state as this could help drive investment decisions in this or other blockchain games.
Government
Countries around the world have different types of governments: most of them are democracies, some are dictatorships and a few are still monarchies. This is overly simplistic of course but the point here is, would you rather live in a country that has a democracy or a dictatorship?
In the world of blockchain there are no true democracies, the best we can hope for is plutocracies (the rule of the rich) but sometimes the only thing we will get is dictatorships. Axie Infinity for example has in its roadmap to turn AXS (one of the two currencies used in the game) into a governance token where the voting power of each individual is directly correlated to how many AXS they hold. That form of government is technically a plutocracy. Today however that’s not the case as Sky Mavis, the company who develops the game, makes all the decisions about its future. In other words, Axie Infinity’s form of government today is akin to a dictatorship.
Dictatorship is not a good starting point in our analogy for us democracy lovers but keep in mind that every single company is internally organized as a dictatorship, not a democracy (when was the last time you elected your boss?). A dictatorship is the logical starting point for any blockchain game but the expectation is for it to evolve to a more participative form of government over time using Decentralized Autonomous Organizations (DAOs).
Monetary Policy
Almost every country on Earth has its own fiat currency that’s controlled by a Central Bank. The Central Bank is the legal entity that’s in charge of the country’s monetary policy that allows for the expansion or contraction of the amount of money in circulation with the purpose of stimulating the economy (creating jobs) while keeping inflation under control. Too much money in circulation and inflation might pick up decreasing the population’s wealth. Too little money in circulation and the economy my contract increasing unemployment.
Some countries like Ecuador, Panama or El Salvador don’t have their own fiat currency and instead use the currency of another country, in this case the US dollar. These countries can’t implement their own monetary policy as the monetary policy of the US dollar is defined by the Federal Reserve (FED).
An even smaller number of countries might have more than one fiat currency used for different purposes and with different exchange rate as it’s technically the case in Venezuela with the Bolívar and the Petro, and it was the case for Cuba with the Peso and the CUC (the dual convertibility ended earlier this year).
Axie Infinity presents a curious combination of the three scenarios outlined before. It has two native tokens, SLP and AXS, used for different purposes and with different value in the market. SLP is used to reward players for winning battles against other players or NPCs while also needed for breeding new Axies. AXS is awarded by winning tournaments and ranking high on a “season” and is also needed for breeding Axies. Finally ETH, the native cryptocurrency of Ethereum, is used in its ERC20 format (WETH) for buying and selling Axies in the marketplace.
The decision to use ETH is probably to provide stability on the prices seen on the marketplace as it has a much bigger market capitalization compared to AXS and SLP and thus its price is harder to move. This is similar to the reasons why a country like Ecuador decided to ditch their own fiat currency (Sucre) in favour of the US dollar. They were looking for economic stability.
SLP is the crypto currency that most closely resembles a fiat currency as it’s maximum supply is not capped like Bitcoin and the amount of currency in circulation can be controlled by modifying the reward structure defined by game studio. This means that Sky Mavis acts like a central bank defining a monetary policy that could be used to promote user base growth while preserving the value of AXS and SLP in exchanges.
On August 9th 2021 we had a sneak peak of this monetary policy in action when Sky Mavis decided to cut in half the SLP rewards for PvE (Player vs Environment) in order to preserve “the long term health of the ecosystem” after the amount of new SLP being minted greatly surpassed the amount being burned.
Figure 1. Daily amount of SLP minted vs burned from Jan 2020 to July 2021 (source)
Fiscal Policy
Another tool available to every country, whether they have their own currency or not, is fiscal policy, the power to use taxation to stimulate the economy of a country as whole or specific sectors of interest. For example, if a government wants to promote the use of green energy it might decide to lower the taxes for electric vehicles to make its final price competitive compared to combustion engine cars. The fiscal policy is normally under the purview of the executive branch and not the central bank.
Sky Mavis has both the power to define the fiscal and monetary policy of Axie Infinity. On the same day that SLP rewards were slashed, the company also cut in half the amount of AXS required for breeding Axies which can be thought of as tax cut. Decreasing the AXS requirement (tax reduction) could potentially increase breeding as it becomes more profitable. Increasing breeding also increases the amount of SLP being burned creating a positive pressure on the price of the token.
Transparency
How much money has been collected in taxes? How much money is spent in the military? How much in education? How can we be certain that the results of an election are real? As a citizen those are questions that you expect to have a clear answer from your government. As an investor you would also like to know how much money the central bank is printing or the size of their reserves in the central bank. Transparency is a key characteristic of an advanced economy.
In the case of blockchain games, transparency is even more important than for countries. In a land where code is law you want to have access to the code and to the transactions inside the network to independently validate the claims that the game developer studio makes about their product. The blockchain mantra is “never trust, always validate”. Every time you are asked to trust someone or something on the blockchain space, be careful, this is an unregulated market where anything can happen. You can easily fall victim to a scam and there’s no one that would help you recover your assets.
This is one of my biggest pet peeves with Axie Infinity as the blockchain they use is not open to the public. You can’t set up your own node to validate every single transaction and to explore the network like on Bitcoin or Ethereum. You have to trust that the companies Sky Mavis selected to become validators are being honest and that’s a dicey proposition. If it weren’t for Sky Mavis disclosing the chart shown on figure 1 we wouldn’t have known that the minting of SLP was getting out of hand. How can we as investors make rational decisions without trustworthy data?
Sure, the game is still in its early stages and the technology for permissionless blockchain is still not fast enough to support the needs of a game like Axie Infinity. But that will change soon with the advancements on layer 2 solutions on Ethereum and the growth of high TPS (Transactions per Second) blockchains like Solana. Sky Mavis gets a free pass for now, but they should make transparency a priority if they want to attract a bigger audience to the game.
Demographics
Advanced economies are facing the pressure of an ageing population and the drop of fertility rates. For an economy to grow the rate of people in working age compared to retirees should remain positive so the weight of social services for the elderly is compensated by taxation of the young. Some countries like Canada offset the impact of an ageing population with immigration thanks to a well thought and fairly efficient immigration process.
The growth of the economy of a blockchain game is also dependent on how many new gamers join as it has an impact on the demand of in-game tokens and NFTs. In contrast to our nation-states, immigration is not a zero sum game as a gamer can belong to multiple “digital nations” simultaneously. Furthermore, blockchain games have the potential to attract people who are not traditionally considered to be gamers as they present a powerful economic incentive that could increase the total gamer population.
Currently there are around 1.2 million daily active users (DAU) playing Axie Infinity and just during the last week we saw a 20% increase of the user base. To put this number in perspective we can see the user base of popular mobile games (Axie Infinity is mostly played on mobile). According to Wikipedia at its peak there were 40 million people playing Pokémon Duel, 100 million playing Yu-Gi-Oh! Duel Links and 1 billion playing Pokémon Go. Those numbers are huge even when we consider that those games don’t generate an income to players. By some estimates the play to earn model could increase the user player base by 10x.
Figure 2. Growth of daily active users on Axie Infinity
Taking Axie Infinity as an example, the price of Axies on the marketplace has increased even though there’s no Axie sink or a mechanism to destroy them to balance supply and demand as is the case with SLP. This is possible because of the rapid growth of its user base that needs to buy at least 3 Axies to play the game.
Conclusion
There are a lot of parallelisms between nation states and blockchain games. Maintaining the right value of economic growth and long term sustainability requires very well thought out policies and constant monitoring. Any serious team wanting to build a blockchain game should include in their ranks an economist to define such policies. In a not too distant future we might see the former head of a central bank working as an advisor for a blockchain game company.
As blockchain games become more sophisticated they could become the perfect place to start experimenting with policies that can be applied to the real world. If you would like to see the potential effect of Universal Basic Income (UBI) on a country’s economy, give away SLP on Axie Infinity to every single player and analyze changes in their gaming pattern. Do they invest less or more time playing? Do they switch focus from playing to other more profitable areas like breeding? Those results could shed light on the impact of economic policies on human behaviour.
The play to earn model that blockchain games enable has the potential to significantly increase the global pool of gamers and provide a steady source of income to millions of people in underdeveloped countries. The metaverse is just getting started.