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Non-Fungible Tokens (NFT) proved to be an outlier in the general decline of the cryptocurrency market in January. These digital collectibles largely maintained their value during the downturn, with some of the top projects even showing increases in several metrics.

In the midst of this generally good performance, a curious case has emerged – arguably the biggest NFT game, Axie Infinity, bucked the trend and lost nearly half its value in January 2022. The plunge could be attributed to the overall market crash, but the problem is that gameplay and its economy may have exacerbated it.

Axie Infinity's economic problems

Axie Infinity's problems can be attributed to the "play-and-earn" model used in the game. This model has become a staple of the industry and has led to an increase in cryptocurrency adoption. Many gaming guilds have also emerged and many venture capital firms have invested heavily in them.

The value of Axie Infinity's in-game currency, Smooth Love Potion (SLP), plummeted to new highs last summer. The price peaked near $0.40 and then slowly dropped to around $0.10, below the price it was before the game's mainstream adoption last year.

The crash was closely related to the hyperinflation of the SLP that was caused by the game's profitability goals. The rapid growth of the game's players created a situation where SLP was minting high and burning slow. Between April 2021 and November 2021, the game grew from 38,000 to 2.1 million daily active users.

As a result, the resulting hyperinflation created a huge selling pressure that Axis Yuk – the destruction mechanism of the economy – could not keep up with. This resulted in P2E goals being defeated as players were unable to earn what they had been earning months earlier. A player might earn $35 per day at the highest price on July 21, while he can only earn $1 today. This is assuming they both earn the 100 SLP bonus.

Since then, many players have abandoned the game and started selling off their assets due to reduced revenues. The game's trading volume has plummeted 70 percent from its peak. In addition, the base price of Axie characters has fallen to around $30, and its governance token has lost 40% of its value since Christmas.

The Axie development team is aware of these challenges and is addressing them. First, they created several SLP receivers, such as the SLP/ETH farm on Katana, that reward users with RON tokens. Second, they offered limited edition items to players who burned Axies. Finally, the developers want to introduce more utilities for SLPs in the game. They intend to introduce body part upgrades and land-based gameplay along with an updated combat system, which will increase the demand for SLPs.

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Axie Infinity's fall reveals the differences between P2E NFT and other NFTs

There are significant differences between P2E NFT and other digital art in terms of use cases and utility, although both are primarily images. For example, the Bored Ape Yacht Club (BAYC NFT collection) offers its owners exclusive rights and access to celebrities and influencers. Owners also airdrop new NFT collections while attending some of the most exclusive parties. These rights acquired by owners are considered to justify the high cost of acquiring them. Just recently, the floor price of BAYC surpassed 100 ETH.

P2E NFTs, on the other hand, are somewhat dwarfed by comparison. They do not offer any of the access, rights or exclusivity that BAYC offers. Their value depends on their ability to make money for their holders in the context of a particular game. They do not offer the bragging rights that other NFT collections offer their holders.

There is no doubt that the P2E ecosystem faces the daunting task of overcoming the current challenges. No NFT developer has yet proposed a solution to these fundamental problems. Although possible, developers will find it difficult to create a "game to earn" model that rewards players without generating financial incentives, which would devalue the reward currency.

Some of the largest game publishers have previously tried to introduce real money into their games, with little success. Despite its many benefits, blockchain did not solve the problems these developers faced in their initial attempts.

Finally, P2E developers must develop a plan to prevent SLP challenges from occurring in order to reward them with in-game tokens. The true success of the model depends on this, otherwise it will go bankrupt. For now, Axie Infinity will use their vast resources and tweaks to their game's economy to help. But until they provide a lasting solution, they will only delay the inevitable demise of the emerging sub-sector within the cryptocurrency space.

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About the Author

Kingsley Arlow

Alo Kingsley is a financial writer with over 4 years of experience in blockchain and cryptocurrency journalism. Alo first discovered Bitcoin in 2016 and has been passionate about it ever since, especially the various ways blockchain can help Africa and the world at large. His goal is to give a more geographically balanced narrative to the cryptocurrency space as it evolves. His articles have been published in publications such as Cointelegraph, Beincrypto and Forkast.news.