In-depth analysis of X-To-Earn Ponzi system: speculator effect, team control and sustainability of utility

Original Author: Mai Sakurajima

Stanford Class of 2023

Twitter @GalahadMai

Deep Tide TechFlow is authorized to compile and release

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TLDR：

1. X-to-earn is different from Web2's Ponzi architecture in both economic system and organizational structure; the word Ponzi does not always indicate a scam.

2. The speculator effect, team control, and sustainability of utility are the three core reasons why many X-to-earn projects struggle.

Tokenization is a tool unique to Web3, which has stimulated the rapid growth of this market.It brings users a stronger sense of engagement and alignment of interest, while serving as an incentive tool that gives projects almost unlimited freedom to potentially make money from becoming a protocol or anything else, no wonder X-to -earn has become a hot topic in the L3 (application layer) space.

Without a doubt, I like X-to-earn: STEPN, for example. I love going to a local restaurant with my girlfriend, and the joy of being able to earn back my meal money on the way there and tip money on the way back. I also believe it can help fight an increasingly obese world in a humane way.

However, the more I interact with development teams in the X-to-earn space when I'm performing my VC job responsibilities, the more I feel something is wrong. I don't think we've fully grasped the tools we use today. This is dangerous, both in theory and in practice.

Taking Gamefi as an example, through the integration of P2E, chain games have obtained an unprecedented financial tool to guide, motivate users and increase revenue. But most development teams seem to underestimate the complexity of designing a token-driven economic system, and some even enrich their own pockets at the expense of harming the long-term interests of the entire market. I won't name names, but there are quite a few projects that want to make it easier to put money in your own pocket. These "games" made by pathologically-intentioned and ill-informed teams aren't fun, and usually you don't get anything out of them, worst case, one Rug and it all goes up in smoke.

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The essence of X-to-earn

It's safe to conclude that most of the Gamefi mentioned above are Axie Infinity imitators. Axie has caused the popularity of P2E, and the emergence of X-to-earn later.

Axie, many say, is a Ponzi. At first glance, it does have some Ponzi characteristics, but we need to disambiguate the word,Ponzi ≠ a scam.

In fact,

In fact,Structurally the pension is the largest Ponzi in the world, but it is an integral and active part of our social security:You pay for the people before you, and the people after you pay for you. Note that this is an abstract generalization of how actual pensions work, but you get the idea of ​​what I'm talking about.

Now think of all the X-to-earn projects out there. If you read their white paper, you will find a common assumption:The prosperity of the project and the token depends on more people using the product.

Now consider this: the Web3 narrative basically says, "Early supporters believe in a project, participate in its growth, and everyone shares the rewards". I think the former assumption is logical, while the spirit of the latter is commendable. However, combine the two with supply and demand, and you have a Ponzi structure.

With all that said, my first thoughts are:Ponzi structures are a natural part of any X-to-earn system design.

Current facts:

1. There are many participants in Web3, but they are still a minority compared to the larger Internet;

2. Tokenism naturally incorporates minting rights into the basic elements of each project.

Both of these reduce friction and barriers to transactions.

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X-to-Earn Determinants of Fate

We can evaluate projects by considering their timing, team and product-market fit. However, these standards seem old and insufficient for tokenization projects.

I think the failure of many tokenization projects (of which X-to-earn is a part) can be attributed to three intertwined factors:

1. The speculator effect and the consequences of pump and sell

2. The project lacks timely control

3. Failure to provide sustainable utility

The most common demise of a price-driven project I’ve seen is this: Market is good, speculators come in -> Token speculation is emotional, prices go up -> speculators sell -> Token prices fall -> fear causes actual users to sell -> Token price drops further -> Price falls below the critical line -> Due to small economic returns, users have no reason to stay on the platform -> Game Over.

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The Speculator Effect and the Consequences of a Pump and Sell

When we say that Token is pulled by emotional errors, in essence the price of Token cannot reflect the actual value of the project. When token price increases are not supported by loyal users or substantial usage, but by speculators, sentimentalists, or market prosperity, the project will be in a dangerously high altitude.

This is where the X-to-earn Ponzi system gets interesting. Most Ponzi schemes in the real world usually have participation restrictions; you usually need to be introduced by an insider before you can get in.

This creates a barrier to participation and a closed economic loop in which value is highly preserved unless a participant in the system deliberately withdraws. All this pretty much presents a result:The risk of a Web2 Ponzi scheme is discrete, with little risk to early participants if the system crashes, and no financial incentive for early participants to reinvest in the system.

However, since X-to-earn is naturally nested in the free trading market and based on digital assets, the value delivery system is no longer like a traditional pyramid.

In the X-to-earn system,The value loop is no longer closed and does not move strictly upwards, transaction friction is relatively low, early players can re-enter the game, and value exits the economic system easily.This means that speculators can only participate in the "earn" part and not participate in "X", they can easily buy and sell, which makes the risk continue to spread to everyone, which makes early participants lose money and later It is possible for anyone to make money. This is unimaginable in traditional Ponzi.

In order to solve this speculator effect problem, protocols have designed prevention systems to varying degrees. Stablecoins and DeFi protocols have generally put a lot of effort into this: a stablecoin protocol called TiTi utilizes a simple game-theoretic design to prevent decoupling during tough times.

I think precautionary systems are normal for these finance-focused protocols, because you wouldn't expect a financial services institution to tweak sensitive parameters frequently and haphazardly. On the other hand, however, X-to-earn projects tend not to have these measures, which may be some early"Write to earn "、"Comment to earn "The core reason why the project quickly faded out of this field.

However, there are some exceptions. Although Stepn, a very popular project, does not necessarily have an algorithmic prevention system, it proves that it can indirectly adjust the supply and demand of Token through special in-game events. The 5-day period has proven its effectiveness in stabilizing GST and GMT. Although the market as a whole has been falling since then, and GMT has also fallen, but that is another matter. Let's see how the team will respond, especially with the recent addition of Mable Jiang as CRO (Chief Revenue Officer).

Despite all the practical discussions, we must admit that, on a psychological level, it is difficult for entrepreneurs to detect/resist false price pumps like this:It is impossible for any project party to refuse to see the growth of their projects dozens of times.

I know Web3 has some obscure disdain for Web2, thinking they stink of the old world. butfirst level title

Lack of timely control by the project team

Axie Infinity is one such example. The team's strategic adjustment is correct, that is, integrating with the Ronin chain to maintain the game and have the potential to break through the Ponzi shackles, but this is not enough; Token prices are not strictly regulated, and the bear market since November 2021 Add to that the security breach and the project is now pulled further and further apart.

Some projects affect token prices through direct fund inflows/outflows from fund pools, while others adjust them indirectly through technical operations. The details of how controls are best implemented are best studied with individual examples.

Here, I want to talk about something deep and talk about some founders' philosophical dilemmas:Centralized control from a team contradicts the ideologically escalated DAO governance model, as it runs counter to the ethos of Web3.

in short,

in short,I think trusting the crowd on the most important decisions is a precarious act, especially when the decision touches the heart of token economics.

The Web3 community seems to have a common denominator, we talk relatively more about the bright side of DAOs than the serious side. This sends a dangerously misleading message to founders, because even if a project runs heavily on the DAO model, the founding team, not the crowd, bears ultimate responsibility for the fate of the project (either voluntarily or coerced by public opinion).Excessive decentralization of the management team can actually hurt the long-term prospects of the project, especially during a bear market, it is crucial to maintain a balance between team operations and decentralization in the mind of the founders.

Decentralization means spreading responsibility, and like everything else, we cannot and cannot blame the masses.

In essence, the debate over how much control should be exercised by the center and how much should be exercised by DAOs is akin to a comparison between constitutional and majoritarian democracies. While building a Web3 project is not the same as governing a country, once a founder decides to go the democratic path, he/she must constantly work with and against the masses, and revise his/her philosophy of governance around them.

The United States chose to be a constitutional federal republic, and Stepn decided to favor centralized governance. Nonetheless, both retained appropriate powers to exercise timely control over the underlying financial system, and did exercise control. Regardless of the ideology under which future X-to-earn projects operate,Founders should all pay more attention to the importance of timely control.

Also, I'm not saying DAOs are bad, but before founders try it, they should first have a solid and comprehensive understanding of what they're going to use.first level title

Failure to provide sustainable utility

This is actually quite a tricky question because humans tend to be overly optimistic about the short term and overly pessimistic about the long term. In web3, we mean:People tout Web3 projects no matter what, especially when they represent a paradigm shift, and the sustainability of the logic/trend behind this paradigm shift can be ignored.

This problem was reflected in the SocialFi/ContentFi narrative a few years ago: People said that Token protocols like Rally.io, Chilliz, Decentralized Social, WhaleShark, Obyte, SocialX, ForeFront, etc. marked the emergence of the revolutionary era of Web3 social.

I agree that tokens are a great way to distribute interest and connect fans and creators, but if you analyze the data, the heat around these utility protocols has undeniably waned. Indeed, in fact, unsustainable utility is not the only reason for their decline. We simply don’t have a reputation layer to identify people, cryptocurrency adoption among the general public is still low, we lack other infrastructure and protocols and so on.

But everyone does not deny the fact that after trying these protocols, it is very common for creators to stop using these Token protocols, because the return on use is not incentive enough: the promise is nice, but in reality, the utility output is far away. Far overrated and exaggerated.

However, I still believe in SocialFi and ContentFi, I just think they need more experience to really define the future trends.

Now back to X-to-earn, I'm still building a thesis around what actual long-term utility any X-to-earn project can provide. Maybe in the end X-to-earn is just a great way to get more people into Web3, and that's what Stepn has achieved, but I'm not sure.

I firmly believe thatEven if an X-to-earn project can become a unicorn, if it does not have a clear, previously undiscovered, sustainable utility and chooses to continue to be a bubble, it will eventually fade out of the stage of history.

However, when we leave the question of sustainability utility aside, we also face the question of the faucet and its imitators.

Axie Infinity is undoubtedly a leader. Countless people play games that imitate Axie under the banner of "we improved Axie", and the quality is far inferior to Axie. With Stepn’s daily activity exceeding 530,000, 7-day active users exceeding 1.1 million, and monthly active users exceeding 2.3 million (data on May 5, 2022, from MateRun Dao), countless imitators have created similar games, even Adidas Also joined this track.

Imitating good items is a natural phenomenon, butMost of the current X-to-Earn projects, regardless of the order in which they appear, are essentially Token mining machines with different yields.If it is an imitation board, it already has a disadvantage in terms of time. If it does not have a real unique advantage to attract players to transfer spontaneously, or if it does not work hard to maintain a high rate of return, it will quickly Be eliminated.

I don't think it's necessary to study how these three causes (speculators, control, utility) are intertwined:In the face of the impact of any speculators, X-to-earn, a pure capital bubble without strict financial control by the team, is too fragile in the face of speculative effects.

In conclusion,Whether it's Web2 or Web3, starting a business is no different. Entrepreneurs who aspire to succeed still need to build a meaningful product.conclusion

conclusion

This post is long enough, but before I wrap up, I want to touch on a few scattered thoughts.

The failure of any X-to-earn project is always manifold. In addition to the above three reasons, sometimes we are faced with Citadel shorting the entire market, and no matter what remedial measures are taken, we are finally helpless. In this kind of bear market, some Tokens that have just been released will not even go through the stage of rising and falling, and this situation is becoming more and more frequent. How should we resist these large hedge funds and mitigate the negative impact of transaction activity on project construction? Sounds like a question beyond the scope of Web3.

On ethics and attitudes towards Ponzi:I think it's up to the reader to decide whether or not to join the X-to-earn Ponzi.My current personal opinion is that Web3 is a once-in-a-lifetime opportunity. You and I are both dark horses. It is a good choice not to break the rules and complete wealth accumulation in the gray area. just make sure1) Don't gamble with money you can't afford to lose, and 2) Just don't be a jerk and a liar.