As of 21w20a, axolotls only play dead when in water. However, they continue to play dead after the water is cleared using a sponge or when filling a bucket with water.
Steps to Reproduce:
Spawn an axolotl in water
Spawn a drowned near the axolotl
Let the drowned attack the axolotl until it plays dead
Remove the water the axolotl is in
Expected Result:
The axolotl would no longer play dead out of the water.
Observed Behavior:
The axolotl continues to play dead.
Screenshots/Videos:
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Can confirm. Also affects 1.17.1.