EDIT: Redditors looked at this post and while my theory is appealing for a few reasons (it implies that VCs, like retail investors, are dumb enough to be defrauded), it’s probably wrong. Retail investors are likely being fleeced, but my (elaborate) theory isn’t necessary as an explanation of this — crypto investors will basically buy anything. Axie Infinity is most likely a straightforward Ponzi scheme. Here is an article that contains some evidence for that theory. (apologies, it’s gross and fairly promotional!)
Investors tend to look at highly gameable metrics. Number of concurrent users, cost per installation. They overvalue users because they value acquisition early and spend late.
You could just hire 10,000 people in the Philippines to use your app for ten minutes a day, and you’d have enough metrics to raise enough capital to pay for all the fake users you hired.
Of course, if you were caught doing it, your investors would be annoyed.
So what if you hired other people to do it?
You couldn’t just pay them to — that’s as bad as hiring the users yourself. You could compensate them in some other way, like equity.
Giving them real equity would tip off your investors. It could put you legally in trouble. But crypto remains an option. You can sell everyone crypto with the understanding that if your company gains value, the currency will probably go up. You could even sneakily promise to do a buyback once you’ve raised some capital, which will compensate holders of your currency.
But that’s still problematic for conventional investors. Running an ICO is generally understood as “morally equivalent to a funding round.” The specific problem you’re trying to avoid, which is the idea that investors might see your activity and realize you’re manipulating metrics, is likely to exist — because if you’re running an traditional ICO, there are obviously people who have a stake in those metrics being high.
So what if you came up with a virtual asset that anyone can buy which is explicitly not equity — to satisfy traditional investors — but whose value changes like equity — to satisfy the people who are doing your dirty work?
It’s part of a game or something, but it’s not cash in the game — if you had $1000 in World of Warcraft gold, and a ready way to liquidate that, you might get audited, especially if you just bought the gold. So instead of something that straightforwardly resembles currency, it’s something you consume to generate more virtual currency. The IRS, the SEC, and your investors are less likely to audit anyone just for having the coolest Gnome Wizard.
So as the designer of the system, the asset you’re handing out operates on two sets of rules — one, the explicit rules of your game, under which it’s clearly capital. Two, the explicit rules of the market, under which it’s probably some kind of speculative security, but it’s unclear how much its valuation is pegged to your VC money. The reason that’s unclear is that its value changes in response to marketing and buybacks, not in direct response to funding rounds — so it’s not “equity” per se. The value of platform-associated crypto is expected to bounce around in response to that sort of thing, after all.
That means that in the sense relevant to the people who are hiring the Filipino teenagers to play your game, its value clearly comes from something they can influence — the presence of the Filipino teenagers.
But you can hire unscrupulous middlemen to describe your platform to VCs, selling it based on its outrageously strong metrics, and you can pay those middlemen not to understand your economy. When you do that, VCs are likely to understand that your in-game item is part of the rules of your game, but they are unlikely to understand that it incentivizes people to game the exact metrics they care about.
Now, if you were to do that, that would be fraud, basically. When it comes time to turn a profit from your users, your product will simply fold. So, judged by the normal standards of a B2C product, you will have (knowingly) created an abject failure. But at that point, you will have already gotten paid and the fact that you’d done it would be legally deniable, since all you’d really done is sell game items.
This isn’t about Axie Infinity. What’s Axie Infinity?