Axie Infinity: Exploring the Intersection of Treasury and Community
October 19th, 2022
FLYING FALCON HAS INVESTED IN AXIE INFINITY TOKENS AND NFTS. THIS STATEMENT IS INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE NFTS OR ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. INVESTING IN ANY CRYPTO ASSET IS A MAJOR RISK. THIS IS NOT INVESTMENT OR FINANCIAL ADVICE.
Axie Infinity Shards (AXS) was released in September 2020 as a governance token for the entire Axie Infinity Universe, setting the stage for Axie to become the “first game truly owned and operated by the community that plays it”. This mission will undoubtedly take time, requiring further game development and a sophisticated governance toolkit. We believe the Sky Mavis team, alongside the Axie community, should progress towards this mission in a methodical way with lessons learned from both prior traditional and web3 protocols. This paper explains our thoughts on the AXS token and its role in the wider ecosystem.
Governance tokens are a loaded term and can mean a variety of things. In the Axie Infinity ecosystem, the core role of the AXS governance token will be to influence the allocation of capital within the community treasury. This is a pool of assets currently worth approximately $300M (*1) from revenues mostly consisting of AXS and ETH generated within the Axie gaming ecosystem. The revenues have come from a combination of breeding fees, marketplace fees, and primary sales (land). More recently, revenue is also coming from minting runes/charms, and in the future additional revenue sources can be added within the broader universe of Axie games.
To be clear, all revenues directly associated with gameplay are redirected to a community treasury address that is designed to be “under direct influence of the holders of AXS.” Importantly, to date, Sky Mavis does not make any material revenues from the Axie Infinity game directly, rather they benefit as we benefit through price appreciation and staking yield from AXS. The Sky Mavis entity is entitled to 21% of the total AXS supply and this is their incentive to help drive revenues to the community treasury. The Sky Mavis entity recently staked a large portion of their AXS, allowing the organization to earn yield on their AXS like all other holders and helping further drive their incentive to grow the Axie community treasury.
Revenues generated in the game serve an important function. They provide the capital that is necessary for the community to continue to reinvest in its ecosystem. Presently, investment in growth is primarily funded with newly issued AXS (not from the community treasury) at the discretion of Sky Mavis with community feedback. Examples include a ~$2.4M esports grant, ~$400k for the community builders program, and ~$1.6M for season 1 Origins leaderboard rewards, all paid in AXS. Additionally, Sky Mavis game developers are partially paid in AXS to reward them for their work. While AXS issuance is a clever way to bootstrap growth, too much issuance can lead to a downward price spiral which is why there is a max supply of 270M AXS with specific allocations and schedules per subcategory. Approximately ~102M of AXS has been released into circulating supply thus far, so roughly 38% of the max supply.
The AXS total supply will eventually reach 270M and when that occurs growth will primarily be funded through resource allocation coming from the community treasury. The community will need to be ready to take on the role that Sky Mavis has centrally maintained in directing resource allocation to fund product development and growth. While we likely have a few more years until this supply schedule runs out, we should be preparing now on the actions we should take to set ourselves up to govern the treasury and propel the Axie Infinity nation for years to come.
The most critical financial goal for us today is to build the largest community treasury possible, primarily from revenues generated within the ecosystem. This will allow us to have the capital to fund initiatives to bring about growth, increasing the value for all of us in the long term. This does not mean by unsustainably increasing the costs to conduct certain actions, but rather by both Sky Mavis and the community building fun and enjoyable games that incorporate revenue sinks that are redirected back to the treasury. Currently, many of these sinks are in AXS, though adding more sinks in ETH and/or USDC would allow the treasury to become more diversified. This is something the community should discuss alongside Sky Mavis.
The treasury should be allowed to grow and, in our opinion, be utilized sparingly until the 270M AXS is fully released. We will need as much capital as possible once we no longer have AXS issuance from the original supply schedule. For example, using the treasury today to pay out additional capital to stakers (fee switch), who are already receiving AXS from issuance, or using the treasury to buy and burn AXS would be a shortsighted decision. This would limit the potential capital that we can later use to extend current growth initiatives, such as prize money for top players, grants for builders and salaries for core developers; all necessities to grow our ecosystem for decades to come.
An example would be if the company Amazon initially utilized their revenue to pay out dividends or buy back stock as opposed to reinvesting in growth. Dividends, similar to protocol revenue staking yield, and stock buybacks, similar to token burns, are both ways that traditional companies return profit to shareholders. Amazon to this date, as a $1.4 trillion company, has still never paid a dividend and recently completed their first stock buyback in over 10 years. They have substantial profits, $207B gross profit over the trailing 12 months, but they choose to reinvest this capital in growth which is higher yielding than returning the capital. In general, corporate finance 101 suggests reinvesting revenue in the business early in a company’s life cycle. The Axie Infinity universe should be viewed in the same light. Once Axie has reached critical mass, and is sufficiently decentralized, then it might make sense to vote in a dividend for AXS holders demonstrating how a web3 game can truly give back to its users.
The community treasury, at present, is locked and capital cannot be deployed. This is because, and as noted before, work is needed to build consensus around a bulletproof community governance process and structures to support it. Furthermore, there is no need to deploy that capital immediately given the AXS issuance “budget” described above. Axie needs to reach product market fit and it is likely better to have a single party (Sky Mavis) deciding on capital allocation (through issuance) to set us up for a culture of success. Sky Mavis has, in our view, shown that they are the best steward for the Axie universe as the ecosystem has generated over $4b of lifetime volume, there are 2.2M axie holders, and there are over 750m unique monthly active addresses. Additionally, the pace of new development is accelerating across both Origin and Land with the Sky Mavis team recently hiring their 200th employee.
Until the Sky Mavis led games, both Origins and Land, are more built out, we are best suited to have a visionary leader that can push us towards our mission. Leaving everything up to the community at this stage would likely lead to unproductive conversations and introduce political challenges across stakeholders. This could slow down development and growth and be a detriment to the Axie nation as a whole. There is a reason many of the top companies rose to success through exceptional leadership.
To be sure, the community today does have some roles in governance. Sky Mavis increasingly asks for community feedback through a token gated governance forum, asset gated discord groups and openly on twitter. The token and asset gated forums provide the actual players with a way to have live conversations with the founders and game developers. The level of engagement between team and community are multiples higher than what we see in the traditional gaming world. Moreover, because the game assets are NFTs, the community can more easily sell and exit the game universe should they disagree with the lead developers direction. This all incentivizes Sky Mavis to act in a way that aligns with the playerbase.
As we move towards fully decentralized governance, it will be critical that we have a governance framework that enables us, the community, to allocate the capital from the community treasury methodically. Decentralized governance is an extremely complex subject. For one, voter turnout is a problem in both the traditional and the web3 world. The average election voter turnout among members of OECD, a grouping of mostly high-income countries, has averaged around 65%. In shareholder proxy votes, retail investor voting has averaged around 28% of the shares they collectively own. Web3 snapshot votes fare worse, where in many cases a few powerful voters, such as VCs or even the team, can control the vote. Is it really decentralized governance when voting power is controlled by 5 people? Is 1 token = 1 vote really the best implementation for web3 governance?
As an Axie Infinity community, we are beginning to ask the right questions and paving a new path for finding the right decentralized governance implementation within Axie. We currently have community members working alongside Sky Mavis to build a governance framework that would fit the specific needs of the Axie community. This will likely involve community members earning non-transferable badges for their contributions that would increase their AXS governance weight (Axie Score), in addition to adding localized councils to increase the strength of decision making. The Axie Score, consisting of financial value (AXS) together with social equity (non transferable tokens like achievement or badges), will likely be a good way to reach a minimum viable governance structure. Ultimately, governance will give the community control over a large pool of assets; and we will need a decentralized governance framework that allows us, as a community, to allocate this capital in a way that can help the entire ecosystem grow sustainably. We cannot have a system that enables actors to pull this capital to solely benefit themselves. It is extremely important that we do not rush this process.
Axie Infinity is building a gaming ecosystem that empowers the users to have influence over the direction of the nation. This is uncharted territory. AXS is an asset that allows builders, players, content creators and speculators to be a shared stakeholder in determining the future of Axie. Specifically, AXS holders will have the responsibility of governing the community address where all revenues flow from the collection of Axie Infinity games (Origin, Land, Community Builders games). This will be an important responsibility to help shape the future of the Axie nation for years to come. Let’s take our time and get this right.