Rise and fall of Vietnam's largest NFT-based online video game

Hanoi

IN 2021, when most of the world was in lockdown mode due to Covid-19 that forced millions of people to be cooped up at home, it was the online gaming space that ended up thriving.

Many eyes were on Luciana, a digital world created by a group of game developers based in Ho Chi Minh City that was experiencing staggering growth.

Using a conservative estimate based on in-game transactions alone, Luciana raked in about US$6 million in 2020. A year later, that figure ballooned to over US$4 billion.

The executives at Sky Mavis, the parent company of Axie Infinity - the game in which Luciana is situated - were clearly on to something extremely lucrative.

Sky Mavis achieved unicorn status last year, following in the footsteps of online gaming firm VNG and digital payments company VNLIFE, among others.

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This in-game economy that Sky Mavis had built on the Ethereum blockchain was far more complex than anything in the online gaming space at the time.

Axie Infinity is a trading and battling game that allows players to collect, breed, raise, battle, and trade avatars known as "Axies", which are digitised as non-fungible tokens (NFTs). The players are then able to sell their spawn on an open market.

Each NFT is unique with its providence traceable via blockchain technology. This gives players ownership over their in-game assets and elevates their worth.

New players can join the game by purchasing these axies from existing players. The developers, in turn, take a cut from breeding fees and marketplace transactions.

But axies didn't come cheap. This was in part because players could lend their excess axies to outsiders, dubbed "scholars", who would participate in "scholarship programmes" and pay for the privilege with a percentage of their winnings.

Those winnings were in-game tokens known as Smooth Love Potions (SLPs), another noteworthy innovation.

While most in-game purchases are made using fiat currencies, or with tokens pegged to fiat currencies, SLP floats freely on crypto markets and can be bought and sold on most popular real-world crypto exchanges.

SLPs are also awarded to players when they win battles or complete certain quests. These were experience points that had been converted to crypto tokens at the request of the community, said Jeffrey Zirlin, the co-founder of Axie Infinity, in an interview with The Business Times.

"This was in line with our idea that gamers should own their in-game assets," he said.

This was another unique component of the Axie universe - it was to be a democratic digital nation with a decentralised economy owned by its players.

This "nation" was to be governed by a second cryptocurrency called an AXS. These could be earned in-game and bought and sold on most crypto exchanges. They were to represent a share of Axie and were designed with voting rights and dividends in mind.

This new in-game economy structure proved popular, with revenue and player numbers rising steadily.

Luciana's economy boomed in the middle of 2021. Monthly revenue went from US$670,000 in April to US$364 million in August, according to the Axie World website.

Zirlin credits this to moving in-game transactions to their own blockchain named "Ronin".

"When Axie was built on Ethereum, things were very slow, it was very expensive to transact and there were all these frictions that were making the experience less fun," Zirlin said.

When Ronin came online in February 2021, that process became easier and cheaper and more attractive to players, he said.

This was also helped by the rising popularity of play-to-earn gaming and NFTs, with money pouring into the sector, said Binh Nguyen, senior programme manager of finance and the fintech-crypto hub coordinator at RMIT Vietnam.

Much of this hype could be traced to an article written by Coindesk columnist Leah Callon-Butler, who was also the director of Emfarsis, a crypto-consulting firm in the Philippines.

The article outlined the story of a Filipino family making several hundred dollars a month just by playing Axie. The article quickly gained traction among crypto enthusiasts.

Shortly thereafter, Callon-Butler told The Business Times that she was approached by Gabby Dizon, the founder of Yield Guild Guide (YGG), to turn her article into a video.

At the time, YGG was a small group of players who were simplifying and partially automating their own Axie scholarship programmes, making it easier for members to lend out their axies.

That short documentary, Play To Earn, was released on May 13 last year on YouTube in multiple languages.

In the video, alongside Zirlin and Callon-Butler was American billionaire Mark Cuban, owner of the Dallas Mavericks professional basketball team. It was Cuban who had reached out and asked to be a part of the project, said Callon-Butler.

The play-to-earn concept quickly went viral in the Philippines.

At YGG, from 238 scholars earning a total of 1 million SLPs in January 2021, that number soared to nearly 4,000 scholars and over 16,000 axies by August, with a combined 31 million SLPs valued at US$9.7 million.

Demand for axies and AXS cryptocurrency surged. SLP, however, had begun to rapidly lose their value as the number being minted boomed.

Last August, Sky Mavis decided to intervene, reducing the amount of SLPs that could be earned. Several weeks later, they increased breeding fees (paid for with SLPs), and went further in December by tripling those same fees.

But this should not have been cause for concern, said Zirlin.

"We have a history of intervening and balancing the economy. It's just now when we do it, there is a little bit more fanfare because it's now an economy for millions of people," he said.

At Axie Infinity's peak, a person could earn up to 150 SLPs a day, which would be worth US$54, according to Axies info. By December 2021, they could only earn 75 SLPs worth just US$2.

As a result, revenue dropped 68 per cent in December to US$64 million, and fell again to US$17 million in January 2022 and US$8 million in February.

Luciana's economy was in a freefall, but Zirlin claimed this was par for the course.

"Just like an emerging market nation, there is a lot of volatility in terms of capital flow and that's what we are seeing with Axie."

But that departing capital was leaving an oversupply of axies, and their price fell as a result. From around US$300 last August, the cheapest axie was worth just US$25 in February this year.

"We started to see a larger divergence in the amount of SLP being minted and actually being consumed, so we started looking at major structural changes," Zirlin said.

This led to Sky Mavis, on Feb 4 this year, embarking on its most drastic readjustment yet.

With the size of the Luciana economy barely a fraction of its peak, Sky Mavis announced that the ability to earn SLPs in-game would be scaled back further and the focus would shift from in-game economics to improving game play.

"We believe real player-owned economies will be huge in the future. Axie is just the first of many, and this is a fundamental shift in the way games will be made and distributed," said Zirlin.