A Billion-Dollar Crypto Gaming Startup Promised Riches And Delivered Disaster

But 10 months ago, Armentia, who’s 39, discovered a new game, and with it a new reason to play: to earn a living. Compared with the massively multiplayer games that he usually played, was remarkably simple. Players control three-member teams of digital creatures that fight one another. The characters are cartoonish blobs distinguished by their unique mixture of interchangeable body parts, not unlike a Mr. Potato Head. During “combat” they cheerily bob in place, waiting to take turns casting spells against their opponents. When a character is defeated, it becomes a ghost; when all three squad members are gone, the team loses. A match takes less than five minutes.

Even many regulars say it’s not much fun, but that hasn’t stopped people from dedicating hours to researching strategies, haunting -themed Discord channels and Reddit forums, and paying for specialized software that helps them build stronger teams. Armentia, who’s poured about $40,000 into his habit since last August, professes to like the game, but he also makes it clear that recreation was never his goal. “I was actually hoping that it could become my full-time job,” he says.

The reason this is possible—or at least it seemed possible for a few weird months last year—is that is tied to crypto markets. Players get a few Smooth Love Potion (SLP) tokens for each game they win and can earn another cryptocurrency, Axie Infinity Shards (AXS), in larger tournaments. The characters, themselves known as Axies, are nonfungible tokens, or NFTs, whose ownership is tracked on a blockchain, allowing them to be traded like a cryptocurrency as well.

There are various ways to make money from . Armentia saw his main business as breeding, which doesn’t entail playing the game so much as preparing to play it in the future. Players who own Axies can create others by choosing two they already own to act as parents and paying a cost in SLP and AXS. Once they do this and wait through an obligatory gestation period, a new character appears with some combination of its parents’ traits.

Every new player needs Axies to play, pushing up their price. Armentia started breeding last August, at a time when normal economics seemed not to apply. “You would be making 300%, 400% on your money in five days, guaranteed,” he says. “It was stupid.”

’s creator, a startup called Sky Mavis Inc., heralded all this as a new kind of economic phenomenon: the “play-to-earn” video game. “We believe in a world future where work and play become one,” it said in a mission statement on its website. “We believe in empowering our players and giving them economic opportunities. Welcome to our revolution.” By last October the company, founded in Ho Chi Minh City, Vietnam, four years ago by a group of Asian, European, and American entrepreneurs, had raised more than $160 million from investors including the venture capital firm Andreessen Horowitz and the crypto-focused firm Paradigm, at a peak valuation of about $3 billion. That same month, crossed 2 million daily users, according to Sky Mavis.

If you think the entire internet should be rebuilt around the blockchain—the vision now referred to as web3— provided a useful example of what this looked like in practice. Alexis Ohanian, co-founder of Reddit and an investor, predicted that 90% of the gaming market would be play-to-earn within five years. Gabby Dizon, head of crypto gaming startup Yield Guild Games, describes as a way to create an “investor mindset” among new populations, who would go on to participate in the crypto economy in other ways. In a livestreamed discussion about play-to-earn gaming and crypto on March 2, former Democratic presidential contender Andrew Yang called web3 “an extraordinary opportunity to improve the human condition” and “the biggest weapon against poverty that we have.”

By the time Yang made his proclamations the economy was deep in crisis. It had lost about 40% of its daily users, and SLP, which had traded as high as 40¢, was at 1.8¢, while AXS, which had once been worth $165, was at $56. To make matters worse, on March 23 hackers robbed Sky Mavis of what at the time was roughly $620 million in cryptocurrencies. Then in May the bottom fell out of the entire crypto market. AXS dropped below $20, and SLP settled in at just over half a penny. Instead of illustrating web3’s utopian potential, looked like validation for crypto skeptics who believe web3 is a vision that investors and early adopters sell people to get them to pour money into sketchy financial instruments while hackers prey on everyone involved.

As Sky Mavis’s revolutionary rhetoric began to look increasingly hollow, the company shifted its story. In December it quietly altered its mission statement, deleting the phrase “play-to-earn” and replacing it with the mushier “play-and-earn.” Days after the hack it launched , a long-awaited new version with upgraded graphics and tweaks to the gameplay. Crucially, this iteration doesn’t involve cryptocurrencies at all, because Sky Mavis has acknowledged that many players are willing to engage with a new game only if the complications of crypto are removed. The plan is for to supplant the original game, with the noncrypto version attracting a broad base of players. Of course, Sky Mavis would still also offer a full version with the original crypto economy.

Company executives are trying to give the impression that nothing is wrong, but a clear sense of tension has edged in since token s began to plummet late last year. When I first spoke to Sky Mavis co-founder Jeffrey Zirlin in late January, he told me he was living somewhere in the US but paused when I asked where in the country he was. “I could live anywhere, I don’t usually leave my room,” he said. He did finally give me a more specific location, but asked me not to make it public, noting that his team has gotten death threats. “We have to be careful revealing our location, just like the president doesn’t always have to reveal his location,” he said. “We’re kind of like heads of state.”

Zirlin said he empathized with people who’d lost money—life-changing sums, in some instances. But he added that a crash that got rid of profiteers could have its upside, too. “Sometimes having to flush out the people who are just in it for the money,” he said, “that’s just the system self-correcting.”

The history of video games has seen plenty of in-game economies with real-life stakes for its players. ’s entry to the marketplace can be traced most directly to a fad known as Cryptokitties. These tradable, breedable digital pets, which surfaced in the fall of 2017, during the first crypto boom, were a proof-of-concept for NFTs. As with many things in crypto, the simple fact that they could be bought and sold was enough to spark speculative fervor. Within a few months, Cryptokitties peaked, some selling for six-figure sums.

The Sky Mavis co-founders originally met in forums for Cryptokitties, according to Zirlin. He’d fallen hard for the digital collectibles while living on New York’s Lower East Side and working in finance. In 2018 he moved to Ho Chi Minh City, where another Sky Mavis co-founder, Trung Nguyen, had already begun working on a game that would place Cryptokitty-like characters at the center of a bigger gaming universe. Nguyen had previously founded a social network for food bloggers, then spent three years working for a financial software company co-founded by American venture capitalist Joe Lonsdale. Another co-founder, Chief Operating Officer Aleksander Leonard Larsen, worked as a community manager for a Norwegian gaming studio. Creating started in earnest just as the 2017 crypto boom was giving way to the first crypto winter.

The resulting game was hardly a revelation; Sky Mavis’s initial success owed more to a clever innovation in its technical architecture. At that point, anyone building NFT games was relying on the Ethereum blockchain to handle transactions, leaving character trading and other in-game actions subject to its inconsistent speed and notoriously high transaction fees. Sky Mavis built its own blockchain, Ronin, which lowered costs and improved speed by centralizing the key function of verifying transactions. Purists might have taken issue with the decision to abandon the core blockchain precept of decentralization, but on the other hand, the game actually worked.

The other key to ’s popularity was an economy based on a form of paid labor that has long existed in gaming: the for-profit player. People who owned Axies could rent them out to players, usually in lower-wage regions in Southeast Asia or Latin America, who treated the game as if it were a job. Players who don’t own their Axies are akin to digital sharecroppers, but they’re widely referred to as “scholars,” because they’re supposedly using their rental Axies to learn about the broader potential of investing in crypto. In ’s biggest market, the Philippines, the average daily earnings from May to October 2021 for all but the lowest-ranked players were above minimum wage, according to the gaming research and consulting firm Naavik. Of course, actually converting this income into usable form meant cashing out their cryptocurrencies, at a time when many people involved in were saying cryptocurrencies were only going to get more valuable.

The rise of the scholar class made look like a hit. Player-speculators wanting to get in early flooded the game, sending the prices of its digital assets skyrocketing. Many were open about their mercenary intentions. “I started playing because earning money playing video games seemed pretty unbelievable and amazing,” says Filip, a Slovakian in his 30s who asked to be identified only by his first name. While he doesn’t mind playing , exactly, he acknowledges he’s in it 100% for the money and 0% for recreation. “When I want to play games for fun, I play real games,” he says.

That was widely viewed primarily as a way to make money has proven a major problem for its virtual economy. The game is designed to offer ways to both earn and spend SLP within the game. Any tokens spent within the game just disappear. But play-to-earners instead cash out all SLP by selling them on crypto markets, meaning the total number of tokens increases over time. The additional supply depresses prices, in a crypto version of hyperinflation. Players are constantly hounding Sky Mavis to tweak how the game works in ways that would reduce the amount of SLP in circulation.

SLP prices peaked last July, but as they dropped, players began hoarding tokens in hopes of a market recovery. This strategy is self-defeating, according to Lars Doucet, co-author of a detailed—and overwhelmingly negative—analysis of ’s economy published by Naavik in November. Doucet says is stuck with the “sleeping dragon” problem: Every time SLP begins to rise, the dragons—the people who have been waiting to cash in their SLP—wake up and liquidate their stashes, pushing the price back down.

Even before the broader collapse of crypto, Sky Mavis struggled to address the issues with ’s internal economy. A financial system consisting of people all hoping to put in $1 and take out $2 can last only as long as someone else shows up believing others will come in after them with more fistfuls of cash. Once began looking less profitable, its ability to draw new players decreased, making it even less profitable and setting off a vicious cycle. “ has just been this fascinating tale of people learning hard lessons of economics and monetary policy in microcosm,” says Doucet.

Armentia first heard of last summer from a childhood friend living in Argentina, where many people had started playing the game for money. He and his mother had emigrated to Florida during Argentina’s 2001 financial crisis, when he was a teenager. After the solar panel company he worked for in his 20s went out of business, he started buying luxury goods in bulk, then retailing them at marked-up prices, mostly on cruise ships. That business crashed when the pandemic hit, leaving him in need of a new venture.

Sitting at home with little to do but putter around the internet and take care of his young daughter, Armentia was well aware that people were making money in weird new investments while his savings sat in a bank account. He dabbled in meme stocks and began looking at crypto. By late last summer, he put his first $3,000 into and was soon spending most of his time on the game.

In February he agreed to have me over to show me his typical workday. was foundering, but he was pouring money into what he saw as a temporary market swoon. In the week before I showed up he’d bought more than $5,000 worth of SLP at less than 2¢, figuring the price was bottoming out.

When I arrived in Miami, Armentia told me that his wife, who was skeptical at best about his video game business, had forbidden him from letting some guy he’d met on Reddit into their house. So we met in the middle of the afternoon at a Starbucks in a strip mall. Armentia showed up wearing a baseball hat and a T-shirt with a palm tree on it. He has the stubble and tired eyes of a guy who’d spent the past two years working from a home that contains a toddler. We ordered coffee, found seats near an electrical outlet, and huddled around his laptop.

First we played a few quick games, netting about 25¢ worth of SLP. He then checked in on the dashboard he uses to track his 20 Argentine scholars, whom he pays his childhood friend to manage, before turning to breeding. Armentia started browsing a market on Sky Mavis’s website, scanning Axies that other people had put up for sale. When he found one he liked, he entered its traits into a software program that ran inside Discord, along with the traits of whatever Axie he planned on pairing it with. The program predicted what characteristics the offspring would have, allowing Armentia to assess its market potential. He clicked among many browser tabs at breakneck speed. Video games may now be a spectator sport, but character breeding definitely isn’t—I felt like I was watching someone do his taxes. There was work to do, though, and Armentia kept at it until it got dark outside.

When I asked if this was a strange way to make a living, he told me it wasn’t any less meaningful than his previous lines of work. “What’s the purpose of that bracelet?” he asked of the jewelry he’d been selling to cruise ship passengers. “It’s that someone can wear it and feel pretty, or whatever. Let’s say I create an Axie, and it costs me $30, and I sell it for $60 because I created something that someone else wants. That’s going to provide that same feeling as the people who buy those bracelets.”

Armentia didn’t try to sugarcoat his performance to date. Popping open a sprawling spreadsheet he used to track his operations, he determined that he could theoretically cash out his cryptocurrencies for a $5,000 profit, without touching the 100 or so Axies he was holding. “I’ve been at it since August, so $5,000 in that many months is not something to be proud of, right?” he said. “I could’ve worked at McDonald’s and made more.” But then he gave me his projections for the crypto markets—AXS, he said, would rise to $150 by May. He changed a few cells to account for these predictions, and suddenly his venture did indeed seem more lucrative than flipping burgers.

When the end of May actually came, AXS was at about $23. Armentia estimated his investment was down about $15,000 but said he didn’t know for sure because he’d stopped looking at the spreadsheet.

On May 18, Zirlin and Larsen held a pep talk for the community on Twitch. In the days after the March hack, the company had announced that it had raised $150 million to reimburse victims and repair its infrastructure. But nearly two months later the systems compromised during the hack still weren’t up and running, and the executives were vague about when everything would be repaired. (A company spokesperson said on June 3 that this could happen by midmonth, pending the results of an external audit.)

The co-founders spent a good deal of time on Twitch commiserating with players about the pain the crash had caused. Larsen told the 2,500-person audience that the collective trauma of losing all that money was an opportunity to forge a stronger community. “This is when you can find true friends in the space,” he said. Zirlin, who spent the entire hourlong session grimacing in a manner suggestive of indigestion, noted that gloom was contagious. “Sometimes when you put negative opinions out there on the internet, that affects other people and hurts the project,” he said.

Sky Mavis had reason to be concerned about players losing hope. By late May even top-ranked players were making the equivalent of 68¢ a day, according to Naavik—a total that doesn’t account for the cut any scholars have to give to their managers. The company and other big players in the economy were working to persuade everyone to hold on. Yield Guild Games head Dizon, whose company owns more than 150,000 Axies that it rents to scholars, says games like were always intended to be a steppingstone to something else. “We’ve been trying to warn people, even when prices were high, don’t expect this to be a stable source of income,” he says. Dizon’s pitch now focuses on the of owning NFT gaming assets over time, with the potential for some supplemental money along the way. “It’s a digital version of a gig economy job,” he says.

Sky Mavis, meanwhile, now consistently downplays the financial aspects of . It has brought in a new head of product, Philip La, who spent the past four years as a product manager at the company behind . Before being recruited, La had written a post on his personal blog entitled “Is sustainable?” He concluded that the game’s economy would ultimately fail if all its players continued to think like investors. “ first and foremost needs to be a game,” he told me.

So La is going back to basics, hoping to make more like —a place where players can spend money within the game on things like decorations for their avatars. He says it’s still important that people own their Axies, even if it’s not just about the financial upside. “With that comes the ability to sell those things if you stop playing or whatnot,” says La.

Armentia has largely stopped playing , as have about three-quarters of his scholars. Many have walked away with tokens now worth almost nothing. But at least one was sufficiently seduced by ’s potential to take a significant loan to buy AXS tokens, which he saw as a way to hedge against inflation of the Argentine peso. The local currency has indeed lost since he took out the loan, but not nearly as much as AXS.

For his part, Armentia says he thinks is shoddily designed, and he doesn’t have high hopes that it will bring the significant new user base the game needs. One thing I learned after talking to Armentia for several months, though, was the durability of his optimism. He continues to express confidence that will pay off as an investment in the long term—that crypto gaming will inevitably take over a significant portion of the gaming world, with Sky Mavis leveraging its role as the early leader to take a key spot.

But Armentia’s mind has also been elsewhere. Earlier this year, he and a friend purchased a company that rents out bouncy houses. Instead of crypto prices, he’s been spending his days worrying about what to do when a driver calls in sick, or whether to send his crews out when there’s a chance of a tropical storm.

In early May, on one of the most brutal days in the crypto markets, I texted Armentia to see how he was doing. He replied with a video of a huge inflatable slide, complete with a cannon shooting foam. He had plenty of time to wait for the crypto markets to turn, he said. Then he described his new business in much the same way Sky Mavis now describes its own: “I’m selling fun now.”

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