STEPN and Unsustainable Reward Mechanisms

Guneet Kaur
Jul 14, 2022
|4 minutes read
stepn mechanisms

How exactly did STEPN’s economic strategy/model, which produced quick gains, abruptly change and lead to its demise?

Today, we are aware of numerous NFT revenue models. Notably, NFT holders are rewarded with the “reward” token in Play-To-Earn or Move-To-Earn models. With the help of the lifestyle app STEPN based on the Solana network, it entered the Move-To-Earn market.

Since its launch, STEPN has had a tremendous “run,” if you’ll excuse the humor here. For example, during the first STEPN buzz, the price of GST began to rise in March, reaching a peak of about $8 in late April before falling with the rest of the cryptocurrency market. After disclosing that STEPN was restricting users in China, the price dropped even more. An oversupply of GST tokens has also contributed to the current price drop.

Image via Vader Research

In the meantime, a closer look at STEPN’s tokenomics reveals that, like most play-to-earn (P2E) games, it has a cyclical structure, first encouraging users to earn in-game tokens before pushing them to spend more to accrue more in the future. Before minting additional NFT footwear that they can rent out or sell on secondary markets, new STEPN players are urged to accumulate in-game tokens. And this continues.

According to Arun Krishnakumar (Chief Growth Officer at Bulleiverse), such economic models have previously proved unsustainable because the cycle will eventually result in a declining token price due to the failure to draw in new users (to continue the cycle) if no more outside funding is invested in the business.

“STEPN had its economic model all broken up because of the unfair distribution of incentives among the NFT holders, gamers, and stakers.”- Arun Krishnakumar 

As a solution to the above issue, he proposed a loyalty point system to allow people to accrue points and sell their NFTs as and when they desired to help sustain future innovations in the long run. 

Additionally, he shared some “key learnings” that may help future projects survive and sustain:

  • The first step is to identify all the economic actors in the system. It’s not just for gaming and about gaming. 
  • Founders have to be very clear about the foundations of their products; the builders must be very clear about who the economic actors are within that community and what value they bring to the table. 
  • They then have to see what the incentivization mechanism is across these actors to ensure that they are engaging with the game for the long term.
  • The economy must be modeled in Excel, with several scenarios and sensitivities. Once the sensitivity of a model is understood, we will know the key variables that drive value for different stakeholders, which will inform risk management techniques to protect those variables and the limits therein.
  • There should also be thresholds set for these limits so that we know that the model needs a serious revisit when they are breached.
  • You need to consistently get feedback, tweak and rebuild, or pivot your model accordingly, which you can’t do if the whole model is defined on day one and you go into the market with an arrogance that the model will work in all scenarios. Remember, the market will invariably humble even the most genius mind.

We, at DeFi Pulse, believe that understanding the incentivization mechanism for all stakeholders involved in the game is of utmost importance. For example, if “profit is the sole motivator” to shift from traditional tools like smartwatches to blockchain-based games without anyone  willing to contribute capital, the economic model will act as nothing but as a pyramid scheme (which will collapse due to the unsustainable economics underpinning it). Therefore, before spending hundreds of dollars on a pair of virtual sneakers, it is wise to bear such risks in mind.

Feel free to connect with us on our Discord channel to discuss your own perspective regarding the above analysis!