Axie Infinity announced last February 4 drastic changes to the reward structure for SLP (Smooth Love Potion) and other possible burn mechanisms for the token. These efforts were done to help control the unending descent of SLP. The announcement alone caused SLP's price to pump to $0.012, 40% up from its all-time low.
SLP is the token earned as a reward for playing Axie Infinity. Since July, wherein the token reached a high of 40 cents, it already lost more than 70% of its value. It is now trading at barely 1 cent at the time of writing. Players of the game and other stakeholders have been pressuring Sky Mavis to control price. From more than $500 a month, players now earn less than $60 a month. Just look at that chart.
So what happened to SLP? Why did it experience a landslide in its price? And, what is Sky Mavis doing to make the game more sustainable?
Tokenomics of SLP
First, let’s discuss the tokenomics of SLP and what went wrong.
SLP is an ERC-20 token with an unlimited supply.
It is minted by playing Axie Infinity. Players generate and, in turn, earn the tokens by playing both the adventure and arena modes of the game and by collecting daily rewards from completed tasks. At the time of writing, the total supply of SLP is around 31.9 billion tokens. Yesterday (February 4) alone, 214 million SLP were created.
SLP, however, is also used in breeding new Axies. The SLPs that were used for breeding are burned reducing the total supply. Around May to mid-July 2021, the amount of SLP generated per day roughly equals the amount of SLP burned. Thus, the token has little to no inflation at that time.
High Inflation Rate
However, as the number of its players grew exponentially, the amount of SLP generated far outpaced its burning mechanism. By the end of July alone, 3x more SLPs were generated than burned, 122 million were created and only 45 million were burned. Yesterday (February 4), the ratio was around 5 times.
As we can see from the chart below, the amount of SLP burned per day had remained pretty much constant from mid-July, roughly 40-60 million (with very occasional 70-100 million), while the minted SLPs significantly increased. On November 4, 2021, 1.2 billion SLPs were minted. That was, of course, an outlier as daily minted usually ranges at 150-350 million.
This, of course, significantly increased the inflation of SLP. For instance, yesterday, the supply of SLP increased by 0.7%. If this is annualized, this equates to a 244% increase in supply. This means that the value of SLP is diluted by 244% in one year due to its total supply. The inflation rate, of course, changes every day as total supply and the amount of minted and burned coins vary daily. But still, that very high inflation brought by supply alone can drag down the price of SLP into the abyss.
Declining Demand
The relatively stagnant burning in SLP suggests that the breeding of new axies has remained constant or most likely slowed down since Sky Mavis has continually increased the breeding requirements for axies. Last December 9, for instance, Sky Mavis tripled the SLP tripled the SLP needed to breed axies. Yet, the amount of SLP burned per day roughly stayed the same after that. This means that the game is attracting fewer new players. That’s a bad sign as the game’s growth heavily relies on new buyers of axies with its current economic model.
Sky Mavis, of course, had crafted other ways, albeit sneaky, to increase the demand for SLP. From time to time, the team buffs and nerfs cards to attract existing players to buy new axies. Personally, I just switch Axies. I never buy a new one until one is sold. I’m not sure for other players, though. And personally, that got tiring after a while. For three months now, I haven’t switched Axies.
Improving on this
Sky Mavis is well aware that SLP today is on the brink of an economic collapse. They, too, know that they need to implement drastic changes to sustain the game.
Their first solution was to radically reduce the supply of SLP generated per day. Players will no longer earn tokens from the adventure mode and there would no longer be daily rewards. Their reason for focusing on PVP was very compelling:
Aside from that, they also lessened the SLP rewards for the PVP mode since the daily rewards for PVP is "roughly double the amount of SLP that was burned per day.". Here is the new reward structure for PVP:
These drastic reductions in rewards could earn them the ire of less-tokenomically knowledgeable players so Sky Mavis decided to hand out AXS to more people. Last season, only the top 1,000 players were given AXS and only a total of 3,000 AXS were rolled out to those players. For next season, Sky Mavis plans to give out a total of 117, 676 AXS to the top 300,000 players. I do hope I get to be one of them.
Anyway, this new development can help retain more players and incentivize them to be more competitive in the game. It can also encourage players, of course, to buy better Axies and, of course, buffed Axies. -_-
Aside from that, the team also promised this once again:
Katana
Let us not also forget the Katana DEX, wherein you can deposit your SLPs to liquidity pools and earn transaction fees. SLP can also be used in farming RON tokens. These activities lock up SLP removing them from the circulating supply making it more scarce and potentially pulling up the price.
Why Hold SLP?
Despite the well-meaning improvements Sky Mavis aims to implement, I couldn’t help but question what really is the point of SLP? Why develop another token for the game when there’s AXS?
SLP currently has utility but aside from gaining monetary rewards through breeding, staking, and farming, there’s no other reason to hold it. Unlike Hive, wherein holders of Hive are incentivized to HODL hive as hive power since it’s a governance token and basically you can do more things in the network if you have more Hive Power. Distributing Hive to the community also helps in the decentralization of the network.
With Axie Infinity introducing two tokens and handing out only the basically meaningless token to the community (aside from top players), there’s no other reason to stay in the game aside from the monetary rewards. Without that, the game would collapse. Add to that, you don’t really get to interact with other players in the game. It feels like there hasn’t been a lot of community building in Axie Infinity.
Sky Mavis was good in attracting players but can they retain them?
In the end, to prevent the game from collapsing, they’re forced to open their coffers of AXS to a larger part of the community. Makes me wonder how long SLP will last. But, we’ll see if Sky Mavis can figure out a way to improve the tokenomics of SLP.
These are very interesting developments and we live in a very interesting time. Play-to-earn is still in its infancy and we get to see how one of the most ambitious play-to-earn game, Axie Infinity, evolves to survive.