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What We Can Learn From Axie’s -98% Screwup

By Mauldin Economics. Originally published at ValueWalk.

Axie Infinity Biggest Insurance Cryptocurrencies

Axie Infinity (AXS) made a lot of people rich… temporarily.

In 2020–2021, the crypto token shot from about 14 cents to above $150… handing out a mind-boggling 107,000%+ return… in just one year.

And it didn’t just make investors rich. The Axie token is associated with a video game that pays you to play it. Players—many of them in poorer countries like the Philippines—were making up to $3,500/month.

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That’s 300% more than the average Filipino makes. It’s equivalent to an American making $160,000 a year playing video games.

Keep in mind, these players weren’t professional gamers. They weren’t part of an esports team. And they didn’t receive money from sponsors.

They simply got paid for playing a video game.

Amazing, right?

Unfortunately, like many unsustainable crypto projects, this story didn’t end well. Axie crashed back down under $20. Its user base has plunged by 60%… and players now earn a few dollars a day, max.

What went wrong?

Axie’s Screwup

  • Axie screwed up the one thing you can’t afford to screw up in building a successful crypto project…

Tokenomics.

In crypto, tokenomics are everything.

Tokenomics set the rules for how a crypto token operates. They determine:

  • How many tokens are in circulation
  • How new tokens are created
  • How old tokens are destroyed
  • How the token is used
  • And how the token accrues value from the underlying crypto business (if there is one).

For example, bitcoin’s tokenomics ensure there will only ever be 21 million bitcoins created.

Notice there’s a key difference between crypto and the stock market here…

In the stock market, strict rules dictate what a company can do with its own stock.

Take Netflix (NASDAQ:NFLX). There are about 444 million shares of Netflix stock on the market. Each represents a sliver of ownership of the company’s equity.

Imagine if Netflix management could simply create 500 million more shares out of thin air whenever it felt like it? Clearly, that would dilute ownership and inflict losses on investors. That’s why issuing new shares of stock is only allowed under certain circumstances.

In crypto, no such rulebook exists yet. It’s up to the developers who write the blockchain code to set the rules for their project.

Some set rules are great for investors—like bitcoin’s.

And other set rules are terrible for investors—like Axie’s.

Experiencing Hyperinflation

  • Axie essentially experienced hyperinflation…

I won’t bore you with all the details. In short, Axie players made money by earning in-game currency called “Smooth Love Potion” (SLP). At one point last summer, SLP’s token reached $0.42.

Players earned this “magic internet money” in the game that they could then convert into real US dollars.

But SLP collapsed 98%… falling to $0.005 because of its overwhelming supply.

In other words, SLP’s tokenomics were bad. Every player was able to create a lot of daily SLP, but there were few ways to actually use the currency. That doomed it to crash sooner or later.

SLP was worthless. And no one wanted to play Axie anymore.

  • Do you see how important tokenomics are?

Without good tokenomics, nothing else about a crypto project matters.

Keep in mind, crypto projects have wildly different tokenomics. There isn’t a one-size-fits-all approach. But as I’ve shown you, token design can make or break a crypto… which is why I study the nitty gritty of every token before putting money to work.

In my premium crypto advisory, we favor cryptos that accrue value from the underlying business.

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Article By Stephen McBride, Mauldin Economics

Updated on

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