May 2022 is somewhat similar to 2021 — In a downing market, short sellers targeted the leading algorithmic stablecoins. In the continuous selling, Luna’s collapse drives the depeg of UST, resulting in the end of Terra ecosystem. More importantly, the centralized USD stable coin USDT was also greatly affected and suffered a run on at one point. In May, while the crypto market was falling apart, StepN’s MAU reached a new high of 70W. However, in June, GST and GMT prices fluctuate dramatically due to regulatory policy adjustments and user behavior changes. StepN is now experiencing its most serious challenge since its launch.
This article is the second and also the last part of our previous article 《Expectation Difference to StepN ( Part I )》, which analyzed StepN’s initial operation and main line of changes, as well as its business model. I have the impression from talking to my peers that the success of StepN will be followed by an intensified discussion of ‘X to Earn’ among investors. While there is still considerable disagreement among institutions about Web 3.0. This article therefore discusses StepN’s economic model, ‘X to Earn’ and how to measure the value of Web 3.0.
I. StepN’s Economic Model
StepN adopts a dual-token mechanism in the economic model. Specifically, users need to buy NFT sneakers to run, and receive a certain amount of GST/GMT as a reward of running. StepN’s economic model includes a lot of invisible consumption of tokens, and a limitation of rewards for users. For example, players need to spend a certain amount of GST regularly to maintain and upgrade their sneakers. It also adopts a gem system and a breeding system to increase the playability of the game. According to the price data in May, the payback period remained stable at around 30 days, even in the second week when the market was suffering with dramatic fluctuations. So how does StepN’s economic model control the payback cycle? This section will provide an in-depth analysis of StepN’s tokenomics.
StepN’s token cycle
StepN uses a dual-token economic model: the governance token GMT and the reward token GST, and the economic cycle of ‘Move to Earn’ occurs between the protocol and the user. The token cycle can be broadly divided into two cycles:
Cycle 1: Users buy NFT sneakers in SOL to earn, and StepN gets the transaction fees.
Cycle 2: Users start to ‘Move to Earn’ and obtain GST and GMT as running rewards. Meanwhile, they need to upgrade, maintain and breed NFT sneakers for continuous running. These processes consume a fixed proportion of GST and GMT.
According to the model, the two layers of the economic system can be regulated and modified by StepN. As a result, the user earns project tokens and StepN generates SOL standard income. If the cost of propping up is not taken into account, the project team will always make a profit. This is the case that almost all ‘X to earn’ economic models takes like Axie Infinity and Starsharks.
Is StepN’s revenue sustainable?
At the later stage of Axie Infinity, the price of SLP was close to 0 due to its over issuance, leading to the declining of the whole economic system. Will StepN be able to get rid of such situation? Let’s use the most common gray sneakers to calculate the returns of different levels of sneakers. Using a conservative calculation (excluding Box and Mint revenues), the average daily return for level 1–9 sneakers is 2.4%, with an annual return of over 1000%. With the continuous upgrading of sneakers, the ability to earn also continues to increase, which means that when the growth of users slows down, the proportion of existing users increases, and most importantly the average ability for players to ‘Move to Earn’ will continue to increase.
Set a potential return cap or permanent reinvestment cycle for assets: Neither Axie’s ‘once and for all’ infinite output nor Thetan’s ‘hero usage limit’ are sustainable and counter to the purpose of the game. They should rather introduce a variety of basic consumptions such as upgrade/forge/restoration with moderate negative feedback, set up utility decay curves and design interest-bearing asset models based on unpredictable return formulas.
Folius Ventures: Aiko Jason Kam
Based on the data we can conclude that sneakers in top condition are interest-bearing assets with ultra-high returns, which will lead to token hyperinflation in the absence of a regulated return mechanism (which the project has been regulating). Secondly, ‘Move to Earn’ is still in the growth stage, where the overall running rewards are consumed by users’ demand for upgrades, maintenance, acceleration, etc. The withdrawal of GST is still in a low level, so the project is able to maintain high yield income. It is emphasized that users intend to upgrade for high-level sneakers. In essence, the invisible consumption of GST in the present time is compensated by the accelerated release of GST in the future.
Since sneakers have unlimited interest-generating capacity, if the number of users increases in the future and the pressure on GST withdrawal increases, it will be difficult for the economic system to keep providing high returns to users. Some might say that StepN’s dynamic adjustment of the game and user expectation management can help control the inflation. Let’s take a look at the data of net GST outflow, By May 31, StepN’s accumulated net outflow of GST exceeded $130 million, of which 90% occurred after April. Obviously, the inflation has not been controlled, but is gradually deteriorating. By the Way, StepN’s revenue for the first quarter was $26 million.
Behind StepN’s adjustment mechanism: Mint — Burn rebalancing
In late May, after StepN deployed on BSC, the sneakers’ prices fluctuate rapidly causing the market out of control. The reason behind was that the initial number of sneakers was small and was wildly hyped by the speculative users of BSC. Under such circumstances, the ‘buying instead of running’ speculation disrupted the balance of supply and demand of GST (there is only demand not supply of GST, resulting in a serious increase in price) and the development of ecosystem.
In order to solve such problems, StepN officially published an adjustment to the economic model in early June, pointing out four problems that had arisen in the past and providing solutions to users.
● Problem 1: The cross-realm energy bridge
Solution: When users ‘Move to Earn’ on different blockchains, their rewards will be counted separately.
Thinking: Because the total number of sneakers determines the daily limitation of running rewards, if the number of sneakers cannot be shared across the chain, users on the new chain will need to buy new sneakers to improve their efficiency. This will pull all users on the new chain back to the same starting line, which is conducive to the control of the ecological development of the new chain, but also more fair to new users.
● Problem 2: The (no-exercising) pure mint-and-sell activities
Solution: Users need to consume minting scrolls to mint sneakers, and the probability of getting the scrolls is controlled by the team, thus the team’s influence on Mint is enhanced. In addition, the cooldown duration of minting is increased as well.
Thinking: Under the previous rules, the project could not directly control the minting of sneakers, causing hypes on sneakers by speculative users. Adding the scroll to the mint mechanism actually transfers the arbitrage space of minting sneakers to running users ( scrolls can only be obtained during exercise). At the same time, the cooldown duration is extended, giving the market longer time to adjust to the supply, which is intended to discourage sneaker speculation and stabilize the rate of sneaker release.
● Problem 3: Dynamic Minting Costs
Solution: The amount of GST required for minting sneakers will no longer be a fixed number, but will be dynamically adjusted. In the future, the amount of GST required for minting sneakers will be dynamically adjusted by the project based on market changes.
Thinking: To control the overall inflation rate of minting and limit the intentional arbitrage of pure return users.
● Problem 4: The recycling mechanism of sneakers and gems
Solution: Five pairs of same quality sneakers can be synthesized into a sneaker of the next higher quality. The new sneaker type is probabilistically related to the types of the 5 pairs of sneakers that are used for the synthesis. Users can engrave a short sentence on the new sneakers and it will be immutable.
Thinking: To increase the gaming and consumption attributes in the economic system, destroy the liabilities (NFT) and control the price bubble in the economic system.
Summary: In the GameFi economic system, user activities will naturally trigger mint, reward and burn, and only the stable operation of each activity can promote the healthy development of the economic system. ‘Pure Sell’ makes active users concentrate on Mint behavior, which led to a clogged cycle in the economic system that large amounts of GST being consumed while failing to generate supply and finally becomes a GST bubble. More importantly, as the market turned cold in late May, the bubble was removed & speculators left en masse, and the excess sneaker (NFT) pulled down the entire economic system. The new economic system reinforced the influence of the project on Mint and controlling GST inflation. This hands gains from speculators back to running users. Recent data show that running and speculative users have been significantly suppressed, and Fomo emotion has faded with daily new users shrunk by 2/3 compared to June.
What is the future of StepN?
We can make a simple assumption, outflow = the number of users * running efficiency * GST price. If the user continues to increase by 30% (daily active user size reaches 100W), and the running efficiency will also increases by 30% as the sneakers are upgraded (running sneakers are upgraded by 5 Level), then the optimal solution to solve the pressure of outflow is to reduce the efficiency and GST price (i.e. reduce the user gain).
According to the ‘Move to Earn’ model: high returns attract an influx of new users, user size increases the pressure of outflow, thus only absorbing the inflow of new users to maintain the value of the token can support the high returns. Let’s look through this process carefully, since the supply of the rewarded token is unlimited, but there is a hard cap on the size of new users, meaning the cycle is bound to be unsustainable. When the number of new users reaches the bottleneck, StepN may launch a leasing system to activate the second growth curve and reduce the revenue ratio, meanwhile to launch the marathon and other functions to reduce the selling pressure and convert users from Earn to Move. As we said in the previous article, expanding users and building a community may be the best solution for Move to Earn in the future. ‘Expanding users base — reducing returns — changing mechanisms — building a community together’ is probably the main line of change for StepN in the second half of the year.
Even if StepN fails in maintaining the user income or the payback circle, we cannot deny its success. As a fitness Dapp, it has generated nearly one million Web 3.0 users from both crypto and non-crypto field. The health utility of ‘Move to Earn’ model for users is sufficient to retain users even if the utility of revenue decreases. As for the future, if StepN can strengthen user stickiness and develop social attributes, that would be the second curve to increase its valuation. However, as of the time of publication, there are still not enough social attributes, but the number of new users brought by ‘Move to Earn’ has started to decline significantly, which is definitely not good news.
II. How to View X to Earn
There are many scenarios for ‘X to Earn’ in the crypto market, and I have heard more than a dozen discussions where investors are looking forward to the possibility of token economy being applied in other scenarios, such as Read to Earn, Speak to Earn, Swimming to Earn, Sleep to Earn, etc. We believe that ‘X to Earn’ is a good form of incentive, but just relying on the business model and token mechanism can hardly help the protocol succeed. For example, Genopets did not achieve the same results as StepN as another ‘Move to Earn’ project. If this model is really feasible, both SocialFi and Music can be activated through ‘Chat to Earn’ and ‘Listen to Earn’, however the truth is developers in the decentralized world have great difficulties in exploring terms of social. Take StepN as an example, ‘Move to Earn’ and the dual-token model brings a good start, and the project operation in the later stage is as important as the community operation. From the perspective of an investor, the success of a project requires a lot of effort to allow the token mechanism to drive the landing scenario, which is not something that can be achieved with just one model nor one idea.
● Differentiated business model: Before the rise of StepN, GameFi was nearly at the end of its rope. Lack of playability and user stickiness, a homogenous business model and a guild-based user structure, all these have significantly shortened the game’s lifecycle and led to its demise. The result has less to do with economic models, but because the protocol can not bring other values than investment income, the economic system is broken by speculative users. StepN’s running model provides a differentiating advantage in terms of providing revenue and fitness value to the users, and in this way, I think it will be very difficult for a copycat to surpass StepN in terms of scale and status (not saying that a new copycat will not be successful). The Ponzi model, which was the first to emerge, can accumulate the most wealth to keep the system running, whereas the alternatives will only accelerate the collapse of the system.
● The token model matches the landing scenario: Axie and StepN are still the same in terms of the economic model behind, they have not changed the game itself but the way users participate in it. However, ’X to Earn’ doesn’t solve all problems. For example, we have recently come across a ‘Sing to Earn’ protocol, where users can make money by singing. The protocol wants to tokenize the Web2.0 product ‘Changba’ model to leverage the karaoke scenario. However, in our research on the project implementation, we found that residents in Europe, America and Australia rarely have the habit of karaoke, meaning there is a big limitation to expand the customer base under such a model. In addition, in a ‘Move to Earn’ model, develop
ers need to match the physical radius of intelligent terminal perception data to build an anti-cheating mechanism to prevent use of scripts.
● Sophisticated operation and community operation: The business models of decentralized protocols are diverse and have a relatively short lifecycle. Many innovative models have no successful model to follow and quality teams play a decisive role in the lifecycle of the protocol. On April 13, StepN announced that it would use all Q1 earnings to repurchase GMT until the funds were exhausted (about $26 million). The decentralized world needs teams that value long-term value by feeding back into the ecosystem through team earnings, thus extending the project’s lifecycle. Community operations are important to the development of a project. Taking StepN as an example, users of the first round airdrops helped the project complete the early operational testing and build a good foundation for the official launch later on, with loyal users acting as both the project’s first customers and promotional ambassadors. In the market with drastic changes, StepN has stabilized its payback cycle at around 24 days in response to changing circumstances, showing a strong capacity of management. The differentiated business model and the corresponding community operation are key factors in determining the success of a protocol, both of which do not depend on resources and are entirely determined by developers.
V. How to View Web 3.0
The essential difference between Web 3.0 and Web 2.0 lies in the changing role of users in the application ecosystem, that is, users change from being the creator to the owner, and from being the payer to the beneficiary. In short, Web 3.0 protocols need to allow participants to have and feel ownership. Especially for the Web 3.0 innovation in the blockchain industry, considering the obvious speculative nature of specific groups, the protocol needs to make users experience the sense of participation of owners and beneficiaries, so revenue is the simplest and direct way. If the protocol ignores this, even if the product itself is excellent, it is still difficult to attract users in the circle because it does not meet the essential traits of Web 3.0.
In previous projects I have worked on, if the project team kept talking about the excellent performance of the protocol and the completeness of the product in the meeting, while ignoring how the economic system works within the system, it probably won’t work. Web 3.0 is not designed to improve the Web 2.0 user experience. The blockchain network has an inherent performance deficit compared to the traditional Internet, and focusing on the front end gets just half the results. Looking back at the Dapps that have achieved success: the gameplay of Axie Infinity is not as good as WoW, the slippage of AMM is always bigger than that of order book, and the most successful public blockchain, the Ethereum, hasn’t solved its high gas fee yet, but none of this has stopped them from achieving great results. We can’t define Web 3.0 by the values of Web 2.0, the value of Dapps are actually breaking distribution patterns and creating economic balance. Again, we take StepN as an example, it is never a better fitness APP than Keep. Its success lies in the innovation of user role transformation and income distribution. In terms of economic balance, the user becomes the owner of the game by purchasing sneakers, and the interests of the user and the project owner are bound, resulting in higher customer unit price and retention rate. In terms of distribution, after buying products of traditional fitness APP, the money paid by users then becomes a sunk cost, creating no incentive for fitness behaviors. Whereas in ‘Move to Earn’, after purchasing sneakers, users can be driven to “Earn” by “Move”, and get more economic distribution. These are things that are impossible in a Web 2.0 system.
IV. Summary
We are halfway through 2022 now. The DeFi Summer in 2020, GameFi in 2021 and Layer1 in the last two years all delivering great returns for investors. Looking back at the beginning of the year, investors’ expectations for 2022 were more about the DAO, Web 3.0, Layer2 and cross-chain bridge tracks. In a relatively weak market environment, the explosion of StepN caught everyone’s eye, and the ‘Move to Earn’ model attracted a large number of non-crypto users, which made the decentralized world even more exciting. The market development is far from what people initially envisioned. The good thing is that there are still many ecological deficiencies in the blockchain world that need to be optimized by excellent developers and w hat we can do is to find out the feasible solutions among them that are worth imagining.