Can STEPN eliminate the bubble through external value?

Author: Chain Teahouse

Since last year, there have been ongoing concerns about a bear market in the financial markets, and the crypto space is no exception. Especially with the recent collapse of LUNA, market worries have intensified.

Many believe that STEPN will become the representative project of a collapse following LUNA, as both gained sudden popularity due to high returns, and their product logic is based on the expectation that more and more people will join.

So, is STEPN a Ponzi scheme? Will the outcome be a collapse or a deflation of the bubble?

Ponzi Scheme vs. Ponzi Model

STEPN is a Ponzi, but when we discuss Ponzi, we need to distinguish between discussing the "Ponzi model" and the "Ponzi scheme."

A Ponzi scheme is a type of pyramid scheme, and it is called a "scheme" because its economic model is unsustainable—promising high returns and then using the money from later participants to pay earlier ones. When there are not enough new participants, it will collapse rapidly.

The entire process of a Ponzi scheme does not create value; rather, it is a value transfer—robbing Peter to pay Paul. However, this is not the reason for the collapse, as the essence of finance is the exchange of value across time.

What truly causes a Ponzi scheme to collapse is that the entire value transmission process lacks externality; it is merely a game of passing the parcel. Therefore, to maintain the high returns of the scheme, there must be a continuous influx of new participants to support the earlier ones.

Thus, it is not the absence of new participants that causes a Ponzi scheme to collapse, but rather when the number of "new" participants cannot cover the necessary number to sustain the existing ones, it will collapse instantly. Note that "new" must always exceed "existing."

All Ponzi schemes are based on the Ponzi model, but the Ponzi model does not mean it is a Ponzi scheme; otherwise, all pension funds in the world would be Ponzi schemes.

The difference lies in whether the "external value" generated by the project can gradually offset or completely replace the passing-the-parcel game. For example, last year, the investment return rate of China's basic pension insurance fund reached 10.95%. Without external value, the more new participants there are, the larger the bubble becomes, as new participants mean more pressure to cash out.

Undoubtedly, STEPN's economic model is a Ponzi model, and its high returns are essentially funded by new participants supporting the earlier ones. Whether STEPN is a Ponzi scheme depends on whether its external value can timely offset the pressure brought by new participants.

Growth Pressure of StepN

There is no perpetual motion machine in the physical world; even if there is a perpetual motion phenomenon, it is unsustainable, and the same goes for the financial world.

STEPN's governance token is STEPN (GMT). Although it has fallen 61.5% from its peak of $4.11 at the end of April, it has increased by 1470% compared to its price at launch in March.

The gameplay of STEPN is "Move to Earn," which involves purchasing running shoe NFTs and then running to earn GST token rewards. GST tokens can be used to repair running shoes and purchase/open blind boxes to obtain gems (which can enhance the attributes of the running shoes).

GST is equivalent to an infinitely produced in-game currency that can be used to buy running shoes and gems, which also have no upper limit. Therefore, many ordinary players are engaged in gold farming, meaning they earn GST tokens through regular running.

Additionally, there are users who make profits through Minting by pairing two running shoes using GST and GMT tokens to obtain new shoes.

There are indeed genuine players, but a large influx of new users and gold farming studios are attracted by the extremely high annualized returns, where the annualized return refers to the incentivized GST tokens earned from running daily.

The logic is: purchase running shoes ------ stimulate more people to Mint ------ consume more GST tokens ------ raise the price of GST tokens ------ attract more people to buy running shoes to earn GST tokens…

Thus, whether focusing on running or Minting, the earnings of all users in the STEPN ecosystem come from more people joining. Of course, this process will also stimulate the price increase of GMT.

If we view STEPN purely as a running app, then there is no growth pressure; maintaining existing users is sufficient. However, STEPN's users are clearly attracted by Earn rather than Move, so the prices of GST and GMT tokens are very important; they determine the cost for users and thus the life and death of STEPN.

Note that a higher GST price is not necessarily more attractive. A sharp rise in GST benefits old users but raises the cost for new users, thereby extending the payback period.

Therefore, GST needs to grow, but not too quickly; this difficulty is akin to walking a tightrope.

If STEPN's daily yield (over 2%) is currently a reasonable pace, then next year, STEPN will need over 370 million users, a number that exceeds the most popular fitness app in the world—Keep. More importantly, STEPN will still face growth pressure next year, and it will be even harder to achieve.

If we do not consider external value, STEPN will definitely collapse, but it cannot happen when the number of users decreases, as the collapse will already be triggered when user growth is not fast enough.

The logic is: fewer people buying running shoes ------ fewer people Minting ------ more GST tokens ------ decreasing GST token price ------ further extending the payback period ------ fewer people buying running shoes…

Currently, STEPN's growth has begun to slow down; if this continues, a bubble burst is only a matter of time.

External Value of StepN

However, STEPN has an essential difference from LUNA—LUNA only has speculative attributes, while STEPN also has gaming and social attributes, although currently, the speculative attributes dominate.

Therefore, even if STEPN suddenly collapses at this stage, for the vast majority of users, it would just be like paying for a gym membership.

Of course, the vast majority of users occupy a very small portion of the funds… Losses are primarily a concern for super users and advanced users who account for the majority of the deposits—they are willing to pay for STEPN's gaming value but certainly do not want to pay this much.

The only direction for STEPN to avoid the fate of collapse is to increase external value.

In fact, STEPN is also trying to deflate the bubble, although the effect has been minimal, as it has already been hijacked by gold farming studios.

STEPN's direction is to increase external value, with various methods to achieve this, all centered around iterating on gaming and social attributes. This may seem like a cliché, as every GameFi project describes its future this way. However, the difference between STEPN and ordinary blockchain games is that STEPN is not just a product of the virtual world; it governs users' daily one hour of exercise in the real world.

At least from the perspective of PUA (which you understand as PUA), STEPN is a product that has successfully occupied the "user mindset."

According to STEPN's latest official statement, "We are working to minimize the volatility of GMT and GST."

For example, they introduced a double GST reward activity to stabilize the price of GST. They also increased the Minting cost while reducing the demand for GST, replacing it with more GMT tokens. These measures are all aimed at suppressing the price of GST and increasing the price of GMT.

These small adjustments can only serve a temporary purpose; a more significant change is dynamic Minting, which is the latest Mint model.

For instance, when GST < $2, the Minting cost is 200 GST, which is less than $400 entirely in GST. When GST > $10, the Minting cost is only 40 GST, plus 160 GMT, where the GMT price is determined by the market. In summary, different Mint strategies will apply at different GST price ranges.

Based on the current prices of GST and GMT, the Minting cost is about $510.

Although STEPN's official team has high hopes for the dynamic Minting plan, considering the recent lessons from LUNA and UST, when the downward spiral starts, this dynamic Minting may instead accelerate the explosion.

As we mentioned earlier, perpetual motion machines do not exist; the only direction for STEPN to avoid collapse is to increase external value.

All the actions that STEPN's official team is taking to increase external value can be categorized into two types.

One type is to guide users to shift their focus from returns to health. Discovering value from running gradually replaces the value brought by returns.

In fact, for ordinary users, this is indeed effective. Many people originally walked for no more than 30 minutes a day, but with STEPN, they now walk or jog for an hour every day, leading to changes in their physical and even life conditions.

However, do not forget that ordinary users only dominate in numbers; the real economic value of STEPN is driven by super users and advanced users, who are few in number and primarily driven by economic rationality. STEPN must be prepared for their potential withdrawal.

The other type is donating earnings to charitable organizations, which helps build the STEPN brand.

For example, collaborating with Nori to address climate change and achieve carbon neutrality, with $100,000 per month allocated for carbon removal, which is paid through Nori's market. Collaborating with the FTX.US team to donate the proceeds from the auction of shoe number 999 to charitable organizations through the FTX Foundation.

There is actually a third way, which is currently an idea but has not yet seen action, that is to support mini guilds centered around STEPN, encouraging users to establish small guilds composed of people around them. This can be understood as using a decree to weaken the fiefdoms, but no supportive policies have been introduced yet.

Conclusion

The Ponzi model of STEPN makes it difficult to sustain, and it will face a moment of explosion, with both sharp rises and falls in GST prices triggering the explosion. Although the STEPN team is trying to correct the economic model to avoid this explosion, it is still something that will happen sooner or later.

However, unlike a Ponzi scheme, STEPN has external value, which gives it a glimmer of hope for a turnaround—external value gradually replacing the passing-the-parcel game.

The potential of STEPN's external value is higher than that of other GameFi projects because STEPN is not just a product of the virtual world; it governs users' daily exercise for one hour in the real world, which can lead to more profound changes in their physical and life conditions.

Currently, STEPN's team is working on enhancing the experience of ordinary users and building the brand in terms of increasing external value. These actions may not yield immediate results but can bring longer-term and more useful value—fewer people will complain when the collapse happens.

STEPN is still very immature in increasing external value and does not have more external value than a bicycle shop owner in Changsha creating a similar product.

If we hold STEPN to the standards of excellent internet product people, it is clear that there is still much iteration needed around gaming and social aspects. But who knows if it can be achieved? After all, the controversies caused by launching on the BNB Chain show that the STEPN team's product capabilities are indeed concerning.

Therefore, we cannot predict from a god's perspective when STEPN will collapse, as there are many uncertain factors that can lead to different outcomes.

Nevertheless, STEPN is a Web3 product with external value, and whether it can uncover external value to replace growth pressure is something that only time will tell for the STEPN team.

"Whether in a bear market or a bull market, we will persevere and focus on what we do best—building!" is the latest response from the STEPN team.