I’ve recently been bitten by the GameFi bug and decided to do a deep dive into various games in the hopes of better understanding them.
It’s clear that the first generation of play-to-earn products have leaned heavily on ponzi type economics. It’s no surprise that many of them follow the chart that Axie has with a period of tremendous price explosion and then the token collapsing quickly. To their credit, the token prices do tend to stabilize for a period afterwards before bleeding out slowly. Axie is unique as it was one of the first (and most successful) P2E concepts so the NFTs have caught a floor, which creates inherent value in the overall system. It remains to be seen if the NFT value can sustain this going forward.
As with DeFi, every GameFi idea has its own spin so it is hard to generalize, but they are largely similar in the following mechanics:
a) Buy NFT to enter game. The NFT is typically denominated in a local token
b) This creates demand for the token and increases the price
c) Playing the game generates said token
d) Use tokens to upgrade NFT which allows for faster token generation per minute played
NFT upgrades need to have benefits because it insures that a new user won’t immediately sell tokens that they earn, but rather burn them to upgrade the NFT that they start with. This is an important factor as it locks up liquidity (analogous to staking) that is generated from playing the game in step c. The result is the price of the token rising quickly as you go up the user acquisition s-curve. Early users benefit the most as they get both more tokens per minute (from upgraded NFTs) and higher prices per token. Everyone wins until the user growth plateaus and it all starts to unwind.
Now that we understand how the typical GameFi mechanic work, I wanted to dig into STEPN to see if it is any different. STEPN is a company that has taken GameFi and applied it to moving, creating the Move-to-Earn category.
First and foremost, kudos to the team at STEPN. Whatever happens, I appreciate the use of blockchain to make people do something positive in their lives.
But does it suffer from the same issues as other GameFi ideas?
Let’s fill in the above diagram for STEPN and see if we are missing anything:
Outside capital - Solana
Buy NFT - Yep, you need to buy a sneaker to start running
Earn Tokens - You earn GST tokens when you move
Upgrade NFT - Yep, you can upgrade your sneakers to a higher level. The graphic below shows all the upgradeable attributes. It really isn’t relevant that they have 4 different attributes (Efficiency, Comfort, Resiliance, Luck) — all one needs to know is that all 4 are just attributes you can upgrade that allow you to earn more GST per walking minute
So once again, the over simplified GameFi diagram holds true for STEPN.
That’s bad for it as like all other GameFi, STEPN will hit a wall. One interesting side note is the energy feature that STEPN has added. It limits the amount of time someone can “play” the game and also incentivizes users to buy extra sneakers. This is clever because it slows the minting of new GST, slowing both upgrades and GST supply into the market. This should give the team a longer runway to figure out how to create a sustainable game.
For what it is worth, STEPN recognizes the token problem, which gives me hope they are actively trying to stop it. 2 of their recent blog posts talk specifically about tokenomics:
The issue is I haven’t seen a great roadmap as to how they’re going to break out of the cycle and I fear they will run out of time.
At the end of the day, GameFi tokenomics are really just clever customer acquisition tools. However, users are fickle. They will leave once the tokenomics don’d work.
The ONLY way for the game to avoid spiraling down after a plateau in users is to achieve one of the following:
Create a game that people would play even if you don’t make money
Create an inflow of capital into the ecosystem that has NOTHING to do with the game loop (see diagram below — green MUST be greater than red for it to sustain)
Do I believe STEPN can create a game that people will play even if they don’t earn income?
While I would love to be proven wrong as I think everyone exercising more would be better, the simple answer is - No, I don’t believe so.
Based on the Google Play reviews (ignore the activation complaints), the vast majority of individuals would not use STEPN it if it weren’t for the GST income. Yes it’s fun to upgrade your sneaker and add gems, but I am not convinced this alone would keep users on the platform.
One issue that many P2E games don’t seem to understand is that by forcing customers to buy a $1,000 NFT sneaker to even play the game, you’ve embedded the idea that the product is about making money. Imagine playing World of Warcraft, except it costs $1,000 to even create a character. I bet your view of the purpose of the game would be dramatically different. This is amplified even more when you’re talking about an activity that I can do completely free.
Lastly, if you didn’t make money from STEPN, then you’d be competing with countless other non-monetary running applications. Those teams have spent 100% of their time focused on UX and product as they can’t use tokenomics to retain their users.
The only hope STEPN has is to transition from a token-driven game to a community driven one, though even there I’m not sure if it would be enouogh.
As it stands today, I don’t believe STEPN would work if users weren’t effectively generating income as they moved.
Outside sources of capital
This is significantly more interesting and I believe STEPN has a chance to get this right. I would be extremely bullish if I see the right announcements here.
One side note if the team ever sees this post - Stop Focusing On Tokenomics. The official twitter is focused on GST giveaways, Double-Mint events, and GMT burn → https://news.coincu.com/80646-stepn-buy-back-burn-26-million-gmt/
To me all these are negative. The faster you ramp users, the faster you inflate GST, and ultimately lead to a supply/demand imbalance. I would even oppose a GMT burn. It is the equivalent of a stock buyback for a startup. Why do it? Instead the team should take that money and use it to build a sustainable business (either fun game enhancements or partnerships). There is no tokenomics driven outcome that will work long-term. The monetary inflow will slow, the token will inflate, and then people will ultimately leave. Ironically, it sounds quite similar to an algorithmic stablecoin tied to a high yield product and we saw how that went.
With that said, here are a few potential ideas that STEPN might be able to do:
Partner with a shoe company such as Nike - create unique sneaker NFTs. Even better if Nike is willing to produce limited edition real life sneakers to match
Individuals could purchase limited edition NFTs in the marketplace. This would be a capital inflow into the system
B2B Partnerships with self-insured companies
Self-insured companies have a strong incentive for their employees to be healthier as obesity is a leading healthcare cost
There are a lot of ideas here. One is to have company sponsored sneakers with such features as “Run with your fellow X”, where bonus tokens are awarded if you run together with others in your company
Companies are willing to pay a monthly fee if they see systemwide healthcare costs drop. They also get the intangible of a better culture which should never be discounted. Make the companies pay in GST to create demand for the token (or just pay in USD and auto-convert)
Insurance companies
Insurance companies have very similar incentives to self-insured companies. They are however notoriously difficult to onboard as they care primarily about economics
For example, the above benefit of network effects between employees is irrelevant to an insurance company
STEPN is one of the few ideas which I really think can break out of the GameFi loop. I really hope they do it, but the more they talk about tokenomics and minting, the more precarious it gets. I fear they believe they have more time than they really do. Look how quickly things have changed in the last week with the crypto bear market.
I’ll be updating this post as they announce new features…
Please feel free to comment, criticize, and question. I welcome the dialogue.