Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

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Within two months, Axie Infinity’s daily active users soared from 38,000 to 252,000, and its community treasury grew from less than US$1 million to more than US$14 million.

Author: Yan Liberman, Delphi Digital analyst, holds the qualifications of Chartered Financial Analyst (CFA) and Alternative Financial Analyst (CAIA). Delphi Digital authorized Chain News to publish the Chinese version of the report.
Compiler: Perry Wang

Special reminder: The report was released on June 30, 2021, and the data mentioned in the report are as of the end of June 2021.

Key points:

  • The launch of Ronin, the exclusive Ethereum sidechain of blockchain game Axie Infinity, is a key catalyst for the game’s explosive growth in the past two months. Daily active users (DAU) have soared from 38,000 at the end of April to 252,000. Most new users believe that they are from the Philippines and Venezuela, which complements each other from the growth of Google search trends in these regions.
  • Through breeding and market expenses, Axie’s community vault has grown from less than US$1 million to more than US$14 million in about two months, which means AXS’s P/E ratio (fully diluted valuation/30 days annualized return) It is currently 7.59.
  • Since Ronin’s Gas fee is negligible compared to Ethereum, it makes it easier for more users to reproduce, thereby driving the growth of the number of Axies, reproduction costs and market turnover.

Axie Infinity is a digital pet breeding and fighting game that is popular all over the world. This game can be regarded as a model of the game to make money by playing games. Just as we speak, it has helped thousands of people around the world make money and make a living. Even the billionaire and NBA Dallas Mavericks owner Mark Cuban (Mark Cuban) is also addicted to the Axies elf-in his words: “Now anyone around the world can play games and make money.”

Coupled with the recent launch of Axie Infinity’s exclusive Ethereum sidechain Ronin, the release of the “Play-To-Earn” documentary, and the breakthrough of 1 million Axies, the Axie project has many achievements worthy of investors’ excitement.

In this report, we delved into everything about Axie: we provided the latest statistics reflecting the soaring popularity of Axie, explored the economic principles of Axies reproduction, reviewed Axie’s vault revenue performance since the launch of Ronin, and observed the little love potion (SLP) The fascinating interaction between price, supply and incineration.

For those who want to adopt their own digital battle pets, we provide an overview of the Axies market. Finally, we take you to explore the exciting development behind the scenes of Axie, and what dynamics of this project need to be paid attention to in the near future.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Since the launch of Ronin, Axie Infinity’s exclusive Ethereum sidechain, Axies has been growing at an exponential rate. The above figure clearly shows the scene of rapid user capture (data as of the end of June): Since the end of April, DAU, Axies holders, monthly market turnover and Discord members have all seen significant growth. The Axie Community Treasury also achieved significant growth.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Axie Infinity has recently received a lot of attention due to its “Play-To-Earn” mechanism design, especially after the release of the Play-To-Earn video showing how it can help the Filipino people make a living by playing Axie, it has attracted a lot of attention. .

Last year, a Venezuelan player published an article saying that she earned more from playing Axie for a few days than working for a month. We use Google Search Trends to evaluate the search popularity of “Axie Infinity”, 100 represents the upper limit of the word’s popularity, and 50 means half of the upper limit of popularity. It can be seen that interest in Axie’s Google search has increased significantly in the past three months.

Since April 24, the number of DAU, Axie token holders and Discord members have all increased significantly. Since Discord’s user limit is 100,000, the total number of Discord members has stabilized at around 100,000 in the first few weeks of June. After communicating with Discord, the Axie team removed the upper limit and allowed the number of members to continue to show an upward trend.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Axie Infinity has integrated the legal currency deposit platform Ramp.Network into Ronin Chain, allowing players to purchase easy ETH with credit cards. Players who are not involved in the crypto field can therefore deposit ETH into their Ronin wallet and purchase Axies from the market in a simple way.

Because the legal currency deposit currently only supports the purchase of ETH and does not support the sale of encrypted assets, the data only shows the purchase activity of legal currency entry (on-ramp). On June 22, the daily transaction volume of fiat currency on-ramp hit a record high of about 130 ETH. Considering that it was less than 20 ETH a month ago, this means that it has achieved very strong growth. Since the only use of ETH on Ronin is to buy from the market, it is expected to increase the market transaction volume, albeit only a small amount.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

The daily transaction volume of the market has increased along with the value. The daily transaction volume has risen from approximately US$100,000 per day at the end of April to more than US$4 million in June. The increase in the number of users has positively promoted the increase in market volume, because the threshold for players to play the game is to buy at least 3 Axies to participate in the battle.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Since the launch of Ronin, Axie’s vault revenue has shown significant growth. As mentioned above, the total revenue of the treasury has increased from less than US$1 million at the end of April to more than US$14 million today. One of the unique attractions of the entire gaming industry is its outstanding resilience in the face of macro turbulence, as demonstrated by the 2008 financial tsunami and the 2020 new crown epidemic. A similar trend has emerged in the field of crypto games: Despite the sharp sell-off in the crypto token market, Axie Infinity still has its highest growth month in history.

Our research also focused on subdividing the contribution of reproductive income or market expenses in the treasury income.

Before Ronin was launched, market expenses were the absolute bulk of the treasury’s revenue. However, since the launch of Ronin two months ago, breeding expenses have grown to account for more than 50% of the total revenue of the vault. Before Ronin was launched, pet owners used ETH to pay for SLP and transaction fees. Gas fees are usually too high for many users. This is not only detrimental to pet owners, but the vault also cannot receive any breeding fees.

Ethereum’s high transaction fees have become a factor that discourages many players who want to breed Axies. With the launch of Ronin, the fee structure has become better. Players now pay the same amount of SLP, but don’t need to pay the gas cost of ETH, just spend 2 AXS. This cost reduction is the reason for the recent surge in reproductive activities. At the same time, by paying 2 AXS to replace the gas cost of ETH, the vault now has a new source of income.

Axie issued a statement on June 30, stating that “we will increase the AXS fee for reproduction fees to 4 AXS. This decision was made to ensure that the number of Axies maintain healthy growth and to create additional utility for AXS.” Due to this change, the reproduction rate is expected to decline, but under the current high growth situation, it may only fall slightly.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Axie’s price-to-earnings ratio helps us understand what level of cash flow generation games have become. To calculate the P/E ratio, we use the fully diluted valuation divided by the 30-day annualized average return. The price-to-earnings ratio has fallen from over 800 at the end of April to a recent low of 7.59.

The development history of Axie can be divided into two different periods: the pre-Ronin period before April 28, and the post-Ronin period afterwards. The daily growth of Axie’s vault has increased from less than US$100,000 in April to a peak of more than US$600,000 in June. Ronin’s low gas fee makes it cheaper to breed Axies and trade in the market, thereby increasing the income of the community treasury.

It is worth noting that these are the actual benefits passed directly to the token holders. Projects usually confuse income and income, in which participants such as liquidity providers (LP) share the income, and the remaining part is passed on to token holders as income. All these revenues will go to the community’s all treasury, and after the staking part goes online, the treasury will be distributed to token holders. These are the most real forms of retained earnings.

Near-term forecast

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

We extrapolated the current trend and predicted the growth trend of the Axie platform to the end of 2021. The current DAU of the platform is increasing by about 30% every week. DAU in May and June increased by approximately 55,000 and 172,000, respectively, with growth rates of 167% and 197%.

We realize that the reason why its growth rate is so high is because the user base is still small, so we assume that the growth rate in July is 50%, and then drop by 10 percentage points each month until October, and then it will remain at 20%. Level. This means that there are an average of about 160,000 new DAUs per month. We think this is a conservative estimate because there was an increase of 172,000 in June alone.

It should be noted that the composition of DAU in this game is different from most games, which are mainly composed of individuals who are looking for fun. Axie has some fun-driven players, but it also introduces users who aim at speculation and users who simply make money by playing games.

Whether users have speculative elements is not just “yes” and “no” answers, it just drives many users to different levels. The answer to purely making money is relatively dualistic, but it creates an additional, consistent, profit-driven stream of players. These users cultivate resources, which are then consumed by entertainment and speculative players, helping to promote the growth of the gaming economy. As the user base grows, the demand pool for rare items grows, and the profits of speculators further increase. This economic flywheel encourages all types of participants to join the ecosystem for their own motivation. This is why we think the user growth forecast is reasonable-perhaps too conservative. Using the demand for new users to participate in the game, we can predict profitability indicators from this user growth.

We keep the market fee percentage at 4.25% of the transaction volume and apply it to the estimation of the transaction volume. Although the per capita monthly transaction volume of users has continued to increase in the past few months, we conservatively reduced the per capita monthly transaction volume of users from 12 ETH in June to 8 ETH in December. This indicator can and is likely to rise to a higher level in the short term, but we expect that in the long run, the user growth rate will exceed the transaction volume growth rate. The second benefit of using conservative growth estimates is that it makes year-end indicators look better.

The forecast of AXS in the vault is also a function of DAU growth. We assume that each newly reproduced Axie needs to spend 4 AXS, these are fixed variables. Currently, the AXS cost for each new Axie is 2 AXS, but it will increase to 4 AXS by July 2021. Since each new user needs 3 Axies to participate in the battle, there is a close relationship between user growth and reproduction needs.

In May and June, the ratio of newly bred Axies to new DAU was 5.2 and 4.7, respectively. The current ratio of Axies to DAU is below 5, which means that the market is weak.

On the surface, you might think that the supply of Axies currently meets the needs of users, because each user needs 3 Axies to play, but advanced users and various collectors have many Axies. This is why we believe that the ratio (monthly reproduction number of Axies/monthly new DAU) is likely to remain above 3, but it will gradually decrease in the coming months. Combining this ratio with the DAU value, we can calculate how much AXS will accumulate in the vault.

By the end of the year, the community vault is expected to have 15.6 million AXS and 26,600 ETH, which is equivalent to approximately US$149 million at today’s price, which does not include more AXS that will be deposited after the staking incentives take effect. Token holders have the right to share the proceeds from the treasury and begin to receive income distribution after staking goes online. They can also decide how to spend these assets through governance.

Delphi Digital in-depth report: The fundamentals of the popular chain game Axie have greatly improved. What are the reasons behind it?

We estimate that by the end of this year, approximately 24% of circulating AXS will be held by the vault, provided that no funds flow out of the vault. The inflow of funds from the treasury comes from the reproduction fees paid through AXS, and because 35% of the issued staking rewards will go directly to the treasury. The supply expansion part of circulation comes from 65% of issuance-based staking rewards, which are given back to Staker, mainly from tokens gradually released in various forms by different holder groups.

Axie plans to release the Staking reward mechanism in the third quarter.

In view of the above information, the growth of the treasury may be higher than the expansion of the circulation supply, so it should be interesting to see what the result of the increase in the funds of the treasury will be. Our research also does not consider the supply of tokens that will be invested in staking and receive income distribution from the vault.

Possible weaknesses of the Axie economic flywheel

One way this flywheel model may collapse is through overreproduction.

“Excessive” is in contrast to the expected future players’ demand for these Axies. This will be a process in which multiple steps trigger a chain effect. The front-end load caused by over-reproduction has extremely high demand for SLP. When the SLP scale is relatively small, the problem begins to expand simply because the profitable group enters the field for farming. These profitable users began to cultivate SLP and sell it on the open market, but the demand for SLP in the market is weak.

This happened because the price of Axies started to fall in the background because there were not enough new users to offset the increased supply. As the price of Axie drops, reproduction becomes less attractive. Since SLP is used for reproduction, this means that the demand for SLP has fallen, which is why the aforementioned demand for SLP disappeared. The decline in SLP prices has greatly reduced the attractiveness of the “playing games while making money” model to new entrants, and the growth of players has also declined, and the oversupply of Axie continues. In this case, there will be economic stagnation.

We think this is a low probability event, because it will require a considerable amount of uncontrolled reproduction and an environment where all other natural rebalancing components fail.

In most cases, despite the suppression of SLP prices, there will still be a large influx of players “just for making money” because it is still worthwhile for them. This will gradually erode the oversupply of Axies and again stimulate the demand for reproduction.

SLP price is obviously an important factor here, and SLP speculators actually help to normalize price fluctuations. They act as a source of demand when natural demand slows, and as a source of supply when prices rise. Opportunistic breeders also perform a similar function, by accumulating when the price is cheap, to help reduce the average personal reproduction cost.

During this period, another interesting part that the team can control is the cost of breeding Axies, which has actually just increased from 2 AXS to 4 AXS. In this sense, the team can act like the “Federal Reserve”, raising the cost of reproduction (interest rates) to curb reproduction when inflation is too high, and reduce reproduction costs when it wants to stimulate reproduction.

In the long run, continuing to add practical effects to Axies is the best mitigation measure to deal with such situations. The project team knows this better than anyone, and they considered a variety of measures when designing the game.

We believe that the most noteworthy point is that future upgrades to Axies and the land will require crafting materials. These raw materials are obtained by “releasing” Axies, creating deflationary elements for Axie’s supply.

The deflationary element itself is not the main novelty. The novelty is that the player’s progress in the game will depend on breeding and releasing Axies, which means that breeding will not be purely to create Axies that need to be sold to new players. Decoupling reproduction needs from the needs of new players is crucial. This will also increase the value of the upgraded Axies and increase the profit margins of speculators and collectors. Most importantly, it will further consolidate the economic flywheel that is the core of the Axie economy.

Information disclosure: Delphi Ventures has invested in AXS. Members of our team also hold AXS and Axie NFT. This statement is intended to disclose any conflict of interest and should not be misunderstood as a recommendation to purchase any tokens. The content of this article is for reference only and should not be used as the basis for any financial decision. This article does not constitute any investment advice.

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