Most recent update: [March 3rd , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or Axie Infinity, made available on the VirgoCX Platform, including an opinion that Axie Infinity is not itself a security and/or derivative.
What is Axie Infinity?
Ever since the launch of the Ethereum-based pet collector Cryptokitties, blockchain gaming has always been on the mind of developers. Several similar projects have been created, but none of have come even close to the scale of Axie Infinity. With a market cap of nearly US$9 billion, Axie Infinity is by far the most successful blockchain gaming project to ever hit the market.
Heavily inspired by the beloved Pokemon series, the gameplay of Axie Infinity combines the breeding and creature collection introduced by Cryptokitties with open-ended gameplay that lets you trade, raise, and battle creatures called Axies. What makes it unique, however, is that every single Axie is a non-fungible token (NFT). As such, each Axie holds its own monetary value.
Designed to provide users with a fun, accessible, and educational way to gain exposure to the capabilities of blockchain technology, Axie Infinity has become one of the most popular blockchain projects in the globe, and has been the number one NFT collection on CryptoSlam for quite some time now.
Who created Axie Infinity?
Developed by the Vietnam-based development studio Sky Mavis, Axie Infinity was built as a fun way to introduce the world to the uses of blockchain. The studio is led by entrepreneur Trung Nguyen, business developer Aleksander Larsen, and engineer Viet Anh Ho, who previously work at Google and PayPal. Many of the original team members met while playing Cryptokitties, which had been the first time they had used the blockchain for non-trading activities.
What Sky Mavis wanted to address with the model for many modern games was that any value generated in games was accrued solely to the platform owners. Assets were merely rented from the owners and, even if they were freely tradeable, they were not technically owned by the user – in-game items bought with microtransactions, for example, could be deleted or removed by a developer at any time of their choosing. Axie Infinity aimed to hand the keys of its virtual world to its users, allowing them to shape the ecosystem of the game world while maintaining sovereignty of their assets.
This model has made Axie Infinity infinitely valuable to users in developing countries. The play-to-earn model has made the game popular in nations like the Philippines, Argentina, Venezuela, and Ghana, where the economic opportunities in the game exceed those available in the real world. For example, an Axie player in Ghana can make the equivalent of US$140 to $420 a month, which is several times higher than the country’s minimum wage.
How does it work?
As an Ethereum-based game, all tokens within the Axie Infinity Ecosystem are ERC-20 tokens with the exception of the NFT Axies themselves, which are ERC-721 tokens. The two other tokens in the ecosystem are: Axie Infinity Shards (AXS) and Smooth Love Potions (SLP).
The game, which describes itself as “play-to-earn,” gives players the opportunity to sell their in-game belongings (including Axies, in-game real estate, and accessories) via the game’s NFT marketplace, all while collecting tokens the game generates.
- Axie Infinity Shards (AXS): AXS is the platform’s native governance token, and holders form a part of Axie’s decentralized autonomous organization (DAO). They can shape the development of the platform and its ecosystem, such as deciding how treasury funds should be spent or how the ecosystem fund is allocated.
- Smooth Love Potions (SLP): SLP is earned by playing the game and can be used to breed more Axies. It is awarded to players by beating opponents and completing quests and, the more you play, the more SLP you can earn.
Both of these tokens are able to be traded on exchanges through the Ethereum network.
Axie Infinity borrows many of its gameplay elements from Pokemon; for example, each Axie has their own stats, like Health, Skill, and Speed, which determine the Axie’s effectiveness in a battle. Like Pokemon, each Axie has its own typing (called ‘classes’ within the game) that determines its strengths and weaknesses in a ‘rock-paper-scissors’-like fashion. Playing into the generative capabilities of being an NFT, each Axie has different randomly-generated body parts that determine its unique abilities, further influencing their capabilities in a battle.
These body parts are determined by different percentages, where rarer traits make the Axie more valuable on the marketplace. The rarest types of Axies are those with ‘Mystic’ parts, found only on Axies sold during pre-sale. Three of the most expensive Axies ever sold belong to this category, with the rarest (called Angel) being sold for 300ETH.
How do I get started playing?
The barrier for entry, however, is a little steep. To begin playing at all, you must first purchase at least three Axie NFTs to assemble your starter team. As the cheapest Axies on the market are anywhere from $225 to $250, you can spend over US$700 just to create your team. That’s more than the price of a PS5 or an Xbox Series X! As such, within Axie Infinity’s economy is another micro economy, known as the ‘scholarship economy.’ Here, people lend their NFTs to other players to use and earn with, and the profits are divided amongst the parties – many players in countries like Indonesia and the Philippines are even able to support their families this way.
Although Axie Infinity runs on the Ethereum blockchain, Sky Mavis created a purpose-built sidechain called Ronin, which permits for a higher transaction throughput and practically eliminates gas fees, all while retaining Ethereum’s signature security. To make onboarding easier for users, they also developed a simplified Ronin wallet, where users can transfer their ETH directly to Ronin, where it then becomes WETH, or Wrapped ETH. This WETH can then be used to purchase Axies. Sky Mavis had fully completed a full migration from Ethereum to the Ronin sidechain in mid-2021.
As of writing, consensus on Ronin is reached via Proof Authority, with plans on decentralizing consensus through the Axie DAO. Trung Nguyen has also said that the team may consider a Delegated Proof-of-Stake model.
At the moment, the AXS protocol is currently governed solely by Sky Mavis. As one of the original plans of AXS was the ability to participate in the DAO, development throughout 2021 is focused on giving users more freedom to stake and vote on governance proposals. The team expects that fully decentralized governance should be achievable by late 2023.
The most obvious drawback to Axie Infinity, as a player at least, is the cost of its initial investment. This entry barrier is notorious for pushing away potential newcomers to the game. As with many online video games, there is also the risk of bots and hackers abusing the system. In July 2021, it was reported that some users had made “Axie farms,” which had rows of smartphones lined up dedicated to automatically harvesting SLP.
Another risk associated with AXS is that its value is derived from the popularity of the game and its userbase – if interest wanes or if players move to another competitor, then the prices of the tokens are subject to change.
Axie Infinity is constantly under development and many of Sky Mavis’ planned features have yet to be implemented. The in-game land tokenization is set to be launched in the first half of 2022, along with the aforementioned governance and further play-to-earn elements.
The team is also planning on eventually including a way for new players to get into the game without the steep initial investment; they plan on giving new users non-transferrable Axies that have limited earning potential, to give them a foothold in the game.
If you want a deeper look into Axie Infinity, take a look at these resources:
Axie Infinity on Messari: https://messari.io/asset/axie-infinity/profile
Axie Infinity on CoinMarketCap: https://coinmarketcap.com/alexandria/article/what-is-axie-infinity
Axie Infinity on Decrypt: https://decrypt.co/resources/what-is-axie-infinity-the-play-to-earn-nft-game-taking-crypto-by-storm
Axie Infinity on Coinbase: https://www.coinbase.com/learn/crypto-basics/what-is-axie-infinity
Prior to listing Axie Infinity on the VirgoCX Platform, VirgoCX performed due diligence on Axie Infinity and determined that Axie Infinity is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of Axie Infinity and/or its primary development team;
- The supply, demand, maturity and liquidity of Axie Infinity; and
- Legal and regulatory risks associated with Axie Infinity.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.