Pegaxy: A fundamental analysis of the popular NFT P2E game
Pegaxy was one of the first P2E games that Kyber Ventures invested back in Oct 2021 as a colead investor. Its been almost half a year since then, the game has been launched with its own success and shortcomings. In this article we give an analytical evaluation on Pegaxy’s competitiveness, differentiation factors, the strengths and challenges awaiting them ahead.
Introduction
There is a lull of late in the recently-scalding NFT market. Bloomberg reports an 83% drop in NFT sales volumes and a 30% drop in average selling price since January 31, 2022. Pegaxy, the popular player-vs-player (PVP) P2E NFT horse-racing game in the Polygon ecosystem, has not been immune to this trend. In Figure 1, we see close to an 85% drop in the daily NFT sales volumes in the game since early February. Coingecko also reports a 92% drop in the price of VIS, Pegaxy’s in-game token, since early February. We think this is a good time to ask ourselves some important questions. Is this an opportunity for gamers and investors to double-down on the Pegaxy ecosystem? Has the market thrown away the baby with the bathwater? Or is this a time to head for the exit as fast as possible?
Using principles of fundamental analysis and due-diligence, we look under the hood (or, more aptly here, under the hay) at Pegaxy and attempt to answer these questions. We will not go into details of Pegaxy’s racing mechanics, for which several public-reviews exist online. Rather, we try to understand what makes Pegaxy a strong or weak ecosystem at this point in time. How is the project setup for future growth? And what are some areas that need improvement in the short to medium term?
For the unfamiliar, Pegaxy is a horse racing game pitting Pegas or mechanical horses against each other for a chance to place in the top 3 and win Vigorous ($VIS), the in-game token. Players own Pegas as NFT’s and can trade them on Pegaxy’s proprietary marketplace or on other NFT platforms such as Opensea. The Pegaxy project launched after the public sale of the first 5,000 Pegas in November 2021, and through breeding, has grown today to a stable of more than 500k Pegas, each with their unique bloodline, gender and characteristics (strength, speed, lightning, etc.). Within the game, players can rent, sell, and race their Pegas to mint or earn VIS tokens. VIS tokens can, in turn, be burnt or spent to breed new Pegas, thus driving the in-game economy. The gameplay mirrors a real-world stable and horse-racing setup, and players can participate in the ecosystem as owners/breeders, racers, financiers (e.g. gaming guilds sponsoring scholars), NFT hodlers, or all of the above.
Upcoming developments in the game include special foods to power Pegas, stadiums that host upcoming races (similar to land plots in Decentraland), greater skill-based gameplay, and launch of a mobile-compatible version.
Innovating Horse Racing
Pegaxy is built, like several other NFT P2E games, on the back of Axie Infinity’s tremendous success in 2020/2021. Certain aspects of Pegaxy’s, such as the breeding logic and token governance mechanics, are very similar to the Axie Infinity whitepaper (Figure 2). Looking deeper, however, we see that Pegaxy has come up with a much easier user on-boarding experience, to get players started and immediately enjoy the actual gameplay.
There is no need to download the game, there is no requirement for a specialized wallet (e.g. Ronin Wallet for Axie Infinity) and there is no need to even own an in-game NFT thanks to features such as renting and profit-sharing. This last feature is especially crucial for gaming guilds to provide a simplified, trustless, on-chain profit-share mechanism to their scholars (Figure 3). Indeed, this feature has helped Pegaxy build up its large player base in a relatively short period of time. Pegaxy has also moved away from Ethereum and is built on Polygon, reducing the exorbitant gas fees we observed until this recent lull in gas prices.
Governance
Breeding
Scholarship/ rental model
On the other hand, it can be argued that Pegaxy’s gameplay is too simple. Race outcomes are determined entirely by Random Number Generation (RNG), leaving no room for player skills. Though Pegas (the in-game NFTs) have elements such as strength, lightning and speed, these are not incorporated into determining the game outcome. In discussions with the core team and by following Discord conversations, we learned that there are plans to build greater skill-based mechanics to the game this year. This is exciting news! Since Pegas have been conceptualized with unique characteristics, bloodlines and rarity, the Pegaxy dev team can pull several levers to bring more player skill and strategy into the game-play. For instance, special races in bespoke stadiums with higher rewards for the rarest of Pegas.
Galloping to the top
The NFT gaming sector is disrupting the traditional gaming sector, which was last reported to be worth more than $300bn by Accenture. So far, NFT’s as a whole make-up $41bn in market cap showing the large addressable market before Pegaxy. So far, Pegaxy has an all-time sales volume of $177mn, and has sold 155k unique Pegas in its marketplace. In comparison, Axie Infinity has an all-time sales volume of $4.1bn and has sold >15mn NFT’s. While the gap between the two looks immense, Pegaxy’s sales volume as a percentage of their fully diluted market cap is 0.8 compared to 0.3 for Axie Infinity, showing that Pegaxy is punching way above its size. On-chain data also shows Pegaxy’s 24h sales volume as 4th among much more established, well-funded P2E games out there. This makes it clear that Pegaxy is galloping at a rapid pace since starting up in November 2021, just 5 months ago.
A Sprint or a marathon?
Pegaxy has a dual-token model, similar to Axie Infinity. VIS or Vigorous, is the in-game token with an uncapped supply, and PGX or Pegaxy Stone is the governance token with a supply of 1bn, out of which 57mn are currently in circulation.
We first look at the genesis token distribution of PGX and how it is allocated to various stakeholders (Figure 5).
At this point, the only clear distribution is to investors and the team. It is not yet clear what tokens are allocated for game rewards (the whitepaper mentions that some PGX can be earned through gameplay) and what proportion will be owned by the community. This lack of clarity is mainly due to the token distribution schedule still being developed, however, it increases the risk of token concentration and project centralization. This concern is emphasized when, compared to other NFT P2E projects such as DeFi Kingdoms or Tinyworlds, where (i) token allocations are clearly documented and early investor and team shares are much lower; (ii) investors + team own 10% (DeFi Kingdoms) and 25% (Tinyworlds) vs. 44% at Pegaxy. On balance, it’s worth mentioning that the above games can have additional revenues that token holders don’t get. Moving on, Pegaxy mentions several times in their whitepaper that creating a successful game would take time. The 12-month lock-up + 12-month linear vesting for the team, and the 3-month lock-up + 12-month linear vesting for key investors; however, looks rather short vs. this long-term vision. The team and key investors can offload tokens just as the project is establishing itself in the market.
A final aspect that makes us cautious at this moment is the lack of any utility of the token. Though it is designed to be a governance token, there are no governance mechanisms in place at Pegaxy. As early stage investors, access to governance rights is important for us. Yet, we have found missing governance on the token to be the norm in NFT gaming where gaming studios and developers have emphasized speed of build and launch vs. nailing down democratic governance. What gives us optimism in Pegaxy’s case is the transparency from the project team about the need for centralization in the early stages of development, as well and increasing talk by the team to roll-out Themis, Pegaxy’s governance portal for PGX holders.
Moving onto the in-game token Vigorous (VIS). Given that the supply cap is unlimited, it is important to understand the minting and burning mechanisms in place for the token. As a reminder, minting or creation of new tokens occurs when players win races in-game, and burning or spending of tokens occurs when tokens are used up for breeding new Pegas. A mint-burn ratio of 100% indicates that players are using all their winnings to invest in the game and breed more Pegas. This also means that there is no inflation of the token value. Inversely, a mint-burn ratio of 0% shows that players are selling all their earned tokens in exchange for other tokens/cryptos (e.g. USDT). This is highly inflationary and reduces token values, which hurts players and increases the risk of implosion of the in-game economics. Ideally, we are looking for a balanced mint-burn ratio for VIS. This is what will help keep the token sustainable over both bull and bear crypto markets, and align with the interests of Pegaxy players.
On-chain data (Figure 6) shows the VIS mint-burn ratio as 87% since game-launch. As a side remark, it is noteworthy that the Pegaxy team monitors this ratio on a publicly available metrics dashboard. It shows us that this is a top-of-mind factor for them as the game develops. 87% is a healthy number and shows that players are investing in new Pegas. This is not surprising, given that we have been in a bull market until the end of January 2022, where new Pegas could be sold for handsome profits.
A risk we see in this bearish market, though, is demand for new Pegas drying up as NFT floor prices drop. This could lead to players burning less VIS for new NFTs, and instead choosing to sell their VIS in the open market. To reduce this dependence on bull-bear token price cycles, Pegaxy can draw several measures. These include improving the gameplay (make the game more fun, improve player engagement, add skill-based parameters), add more sinks for VIS, establish more options for the community to participate (e.g. governance, contribute to the game development, events, etc.). Speaking with the core team, we are encouraged to hear that these are all in the pipeline for roll-out in 2022.
Getting to the finish line
We see Pegaxy’s team as its biggest strength and an important factor in their rapid growth so far. The co-founders, Ken Pham, Steve Nguyen and Corey Wilton, have built up a globally distributed team of 68 members, filling critical roles such as full-stack developers, product managers, customer service and marketing leads.
From participating in their Discord channel, the activeness and strength of their customer service reps and community managers is also seen to be strong. Tons of tutorials, how-to videos and explainers exist on the Pegaxy website, all made in-house. Thus, not only is the Pegaxy team present in numbers, but they also show up with gusto.
Apart from building up an effective team, Pegaxy has also been able to raise funding at incredible speed, raising US$2.5mn in their last funding round in November 2021 from marquee investors such as Shima Capital, Crypto.com and ourselves, as well as from gaming guilds such as Real Deal and Good Games.
Finally, we look closer at the in-game economics of Pegaxy and try to understand how sustainable they are.
An important consideration for us is how the game economics self balance when user count is not growing. Can in-game economics self-adjust without manual intervention needed by the developers? For this, we would like to see two things: (i) greater mint and burn mechanisms in the game that can balance each other out; (ii) more community-drive changes by holders of $PGX in the mechanics and in-game economy. Both are things we are seeing green offshoots towards. More sinks are in development, ranging from specialized foods to gears to buying stadiums. Plans are to launch these in the coming two quarters. Corey Wilton, Pegaxy’s CMO, recently announced plans to launch Themis, Pegaxy’s governance portal, that will give more say to token holders in matters related to in-game economics. Given the rapid development progress and the strength of the fully-staffed Pegaxy team, we are highly optimistic of these two work streams reaching the finish line.
Next, we find Pegaxy’s current guild partnerships as one of their strongest competitive advantages (Figure 7). The project has built up partnerships with close to 150 gaming guilds, in Lat Am, Eastern Europe and Asia Pacific regions, giving them access to a global player pool. Guilds also provide investment capital as private investors to the project, and support in-game economics by buying up Pegas for their scholars. For example, Real Deal Guild is a key investor and also owns more than 5,000 Pegas. Along with Pegaxy’s on-chain rent-to-race model, which makes it easier for guilds to manage pay-offs to their scholars, and Pegaxy’s simple onboarding, this provides a strong strategic moat to the project.
Conclusion
While Pegaxy may have managed to focus entirely on their user growth plans in an NFT bull market, it’s clear that strengthening their tokenomics, governance and in-game economy are equally important at this juncture. We are encouraged to see a culture of transparency among the core team and a swift pivot to the above mentioned aspects of the project too. After our due-diligence, we continue to place our bets on Pegaxy remaining in the winning slot.
And you? Where are you placing your bets? The race is on!