Even before the popular “play-to-earn” blockchain game Axie Infinity was hacked in March to the tune of $625 million, market observers described the game, which rewards its players with crypto tokens, as a Ponzi scheme, and predicted it would hurt thousands of players, especially in the Philippines.
A Ponzi scheme is an investment fraud that uses money from new investors to pay earlier investors and may steal some of the money. Ponzi scheme organizers often promise high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it gets hard to recruit new investors or when existing investors cash out en masse, that’s when Ponzi schemes collapse.
A video game fueled by cryptocurrency and NFTs, Axie Infinity was created by Vietnam-based startup Sky Mavis Inc. as part of the rising play-to-earn gamer movement. Axie’s biggest fans evangelized that “play-to-earn” blockchain games like Axie could provide more opportunity and equality for people traditionally excluded from the global economy. Players could earn in-game currency called Smooth Love Potion (SLP) and exchange the tokens for other cryptocurrencies.
Sky Mavis takes a cut of in-game transactions and sits on a large stash of tokens.
The game was a huge hit in the Philippines, where about a quarter of the 110 million population lives below the poverty line, Time reported. Filipino players represented 40 percent of the Axie user base.
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At least 28 investors bought into the narrative surrounding Axie and its parent, Sky Mavis, raising $311 million in funding over four rounds (the latest funding was raised on April 6, 2022). Investors include some of the most prominent names in crypto and venture capital such as Andreessen Horowitz (a16z), Mark Cuban, Paradigm, Animoca Brands, Accel and Samsung Next.
In March, the largest hack of digital funds to date robbed Ronin Network — an Ethereum sidechain built specifically for Axie Infinity — of $625 million worth of Ethereum and USD Coin after a hacker drained the bridge that connects Ronin to Ethereum’s mainnet.
Three months before the hack, Animats described Axie Infinity as a Ponzi scheme and predicted its collapse, according to a post on Hacker News, a social news website run by startup accelerator and investment fund Y Combinator.
“Axie Infinity. That’s a Ponzi in the collapse phase. Their Smooth Love Potion token is down 90% and in a screaming dive, and their Axie token is down 37% from peak. That one is going to hurt a lot of poor people in the Philippines. Many quit their jobs to play Axie’s play-to-earn game. All the money comes from later entrants, so it’s a Ponzi by definition.”
Liron Shapira, who describes himself as an entrepreneur, angel investor and author in his Twitter bio, tweeted in a long thread that a16z “looked directly at a blatant Ponzi scheme, Axie Infinity” and then invested. “They called it ‘play-to-earn’ and invested $311M into its parent company. Then it collapsed. How Web3 VCs stumbled into funding a Ponzi.”
In a July 25, 2022 report, Time interviewed more than a dozen Filipino Axie players, many of whom said their lives were wrecked by the game. Most were introduced by friends with the promise that they would earn five times more playing the game than they did with their day jobs. “For some, this was true, but Axie’s unsustainable (even Ponzi-like) model finally caught up with them, and they lost way more than they ever made” Coingeek reported.
The entire model was based on the ability of Axie token Smooth Love Potion (SLP) “to stay up … For this, new players had to ape in every so often, creating, essentially, a Ponzi scheme. Even Sky Mavis, the Vietnamese company that created the game, pointed out in the white paper that the game depended on new entrants,” Coingeek reported.
Axie Infinity was trading at $17.42 as of this writing, according to Coinmarketcap, down from a high of more than $160 in November 2021.
Sky Mavis disputes that the game is a Ponzi scheme.
“Focusing on growing a network through early incentives does not make a Ponzi scheme. Axie Infinity’s main purpose is to provide entertainment,” a spokesperson for the company said in an email to Time.
Axie’s failures bode badly for the once-rosy future of play-to-earn future, said Ethan McMahon, an economist at the research firm Chainalysis. “Maybe a select group of the best players will actually be able to earn from games. But any given person’s starting motivation to play will not just be for profit,” McMahon told Time.