How to build a sustainable X to Earn economy?
Review: Owen；Shawn Lin @1PAR
One of the greatest advantages of the crypto economy is the flexibility with which incentive structures can be designed, allowing virtually no constraints to build any form of economic system. In such an economic system, Token is the core of productive relations and an important tool for resource coordination. We have noticed the emergence of a new token incentive model, a new tokenomic model called X to Earn (X2E), where “X” denotes a user behavior encouraged by the system and “to Earn” means that the system provides a economic incentive for that behavior.
From the popularity of Axie Inifity, Play to Earn came to the forefront, and even established a huge Web3 gaming prolific guilds around Play To Earn. After that, StepN ( Move to Earn ) and LetMeSpeak ( Learn to Earn ) came out one after another, and Web3 users realized that the economic model of Play to Earn could have many variantions and it could be applied in more scenarios, so a more general concept was refined, namely, X to Earn.
The broad and narrow sense of X2E
X2E, in a broad context, can refer to all behaviors that gain benefits in Web3, including：
- Use specific hardware devices (generally known as mining equipments) to access decentralized networks and provide services to earn tokens (e.g., Filecoin, Meson, Phala, Helium), which is categorized as MachineFi in this industy; and
- Run nodes of public chain networks for block rewards, including in PoS public chain networks, where tokens are delegated to nodes for revenue.
- Funding in compounding DeFi dapps for yields.
However, the term X2E mentioned in this paper refers to its narrow sense, where X refers to a certain user behavior that emphasizes more on the users’ expenditure on time than on capitals.
Typical examples include:
- Play to earn: Axie Infinity
- Move to earn: StepN
- Learn to earn: Let me speak
- Drive to earn: HiveMapper, CPLE
- Write to earn: CoinHub, CyberNote
In addition, there are more innovative and diversified forms, such as Sing to Earn, Sleep to Earn, Eat to Earn, Meditate to Earn, etc.
Commonality and individuality of X2E projects
In many X2E projects, X is the variable and is the behavior incentivized in the economic system, and Earn is the commonality, which is token revenues generated by the users’ behaviors, and players can exchange those tokens into stablecoins or sell them or reuse them in the system. The token earned by the player may or may not be the same as the governance token of the project. More and more projects are choosing a dual-token model, which separates the governance token from the game token in order to decouplex governance risks and risks within the economic system.
In addition, the vast majority of projects with another commonality, that is, in order to enter the game and make profits, the players have to buy the “ticket” first.
Tickets are in the form of NFT, for example, to earn the token through StepN, you need to buy NFT sneakers; to earn the token by learning English through LetMeSpeak, you need to buy NFT virtual characters first. In some projects, tickets may also be in the form of staking voucher (e.g., CoinHub) or the purchase of smart hardware (e.g., HiveMapper).
Ponzi scheme ?
People are rushing to X2E projects for speculative and profit-seeking. But they are also generally apprehensive about its sustainability and are always ready to leave. What entrepreneurs on the track should be thinking about is that can they create a sustainable X2E model? How should it be done?
Just as life requires energy intake to maintain it, an X2E economic system requires a continuous infusion of capital to help players get rewarded in its ecosystem.
New users feed old users could be a choice for this, specifically, redeploy the fund from new users who bought “tickets” to maintain the earnings of incumbent users ( deploying this money into the bonus pool, or using it to buy the token in echanges). This is not sustainable.
Assuming that the expected monthly return for users is p , tickets price is v , the number of existing users in the current month is s, and the number of incremental users is i, then to maintain equilibrium needs to satisfy i*v >= s*p*v ，that is i >= s*p ，at least. i= s*p
Assuming that the expected payoff period is one month ( that mean monthly return is 100% ), and the number of existing users is 10, to keep the balance, the growth trend of users needs to be as the following curve.
This is a typical exponential growth curve.
This reavel that in order to keep the balance the number of exisiting users and increment users both need to increase, which means that the increment must also maintain a certain growth rate. In other words, in this formula, a sufficient accelerated velocity for the user growth is need in order to promise the general growth.
The constant growth in speed of users is with no promise, let alone the accelerated growth of users? Soon after such an economic system launch, yield p decreases until it fails to meet expectations, causing players leave and enter into a death spiral, a Ponzi scheme. To create a sustainable X2E economic model, we must find some alternative and sustainable sources of funding. Let’s look at a couple of possible paths.
Five possibilities for X2E program sustainability
Type 1 : pay-users feed earn-users
Without external funds, the X2E economy would be impossible for every player to Earn , as those who earn money for spending it, and those who earn money also need someone par for it. If there are players willing to pay, that mean such an economic system provides players with value other than profit only. Maybe this value is physical and joyful by playing the game, or it is helping users to develop a good habit, or a way to make a group of like-minded partners.
Play to Earn game, for example, if the appeal of playing the game goes beyond making money, and the playability of the game itself attracts players to pay, or let them to accept a situation where the revenue from playing is less than the cost, then the economy of system is likely to be balanced, a balance between pay-users and earn-users. In this scenario, pay-users are the real players of the game, and earn-users are somehow serving the pay-users.
This is an incremental process, at the early stage, high yield will attract many users to play to earn, as time goes by, the slowdown of users growth will lead to lower income (often reflected in the lower Token prices), part of the earn-users gradually exit, pay-users and part of the users who accept lower yield have left behind.
In this way, game publisher saves the money that should be spent on publicity, and utilize the power of the crowd to get the word out. In this sense, Play to Earn just change the way of game distributed, and essentially, the decisive factor for the success of a game is its playability rather than economic model.
Type 2 : “Laziness” feeds “Diligence”
Move to Earn and Learn to Earn projects are with the characteristic of “laziness” feeds “diligence”. These two types of programs have a common feature, that is, they use monetary gains to help users be more self-discipline which is not an easy thing. However, if good living habits can lead to positive and instant feedback in the form of money, it may will be more easy to do. When learning or exercising becomes an act of gain money, users are more likely be bouncy and full of energy.
However, without external funds, the problem – —someone earn, someone need to pay – —is still not getting around. It seems like all participants earn token rewards, but assuming that the total market value of token remains unchanged, and excluding the volatility of the secondary market, we can say that only those who cover the inflation are really earning money, otherwise they will become passive pay-users.
It is like that, at the begining everyone starts to earn tokens by excercising or studing, and eventually the relatively lazy ones pay for the relatively diligent ones, creating a balance.
While such a balance is not easy to achieve because the pay-users are involuntarily and passively paying, in spite of they also benefit to some extent from the self-discipline. On other hand, reasonably, not hardworking ones have to pay the price of their relative laziness, but who want to loss money by this way and there must be a limitation of the loss?
In order to slow down user churn, it is important that neither pay-users lose too much nor earn-users earn too much,
StepN, in order to achieve this, choose to limit the influx of new users moderately, and let users consume the token rewards in the system as much as possible in order to reduce the inflation (but now we see that almost all the token consumption scenarios in the StepN system point to earning more tokens, so a more inflationary pressure will increase later on); while LetMeSpeak chooses to give a certain lifetime to the NFT (admission ticket), making the economic model closer to the “clock in” model described as below.
Type 3 : “clock in” model
There is a gym business model where annual fee is $2,000 and you will get $20 back every time you go to the gym in a certain time period, so 100 days is the payback period in ideally. Compared to others, this is a model has a greater incentive effect for customers to persist in.
This clock in model means that the money each user can earn is the money they have already paid, so there is no possibility of it falling into a Ponzi scheme. That mean “lazy customer” who cannot make a return in that certain time period. will be the one to pay for the operating expenses of the gym. So the clock-in model can also be illustrated as “laziness feed diligence”.
Meditate to Earn adopts this model. Users pay $100 at first, then do 21 days of meditation training, each time you complete the meditation task you can get back $5 and get a NFT as meditation medal, if you do not complete the meditation training within the limited time period, the rest principal will be confiscated. (This program is still an experimental product at present.)
Type 4 : Group feeding Individual
We found some X2E programs that have a clear and profit model. After forming a network through X2E, they can provide social services through the network and earn profits that inject back into the bonus pool or use to buy back tokens then burn them to raise the token price. In this case, the profit of the whole network supporting the revenue of each single point.
HiveMapper is a Drive to Earn project, the vision of which is to build a Web3 map product in a decentralized way. Most of the mapping products we have in our phones now are centralized products like Google Maps, Gaode Maps, and Apple Maps. In fact, the companies that run these products are spending huge costs every day to hire dedicated people to collect and update geographic information, which only a giant company with deep pockets can do that.
HiveMapper uses blockchain + crowdsourcing data to build a global map. You just need to buy and install Hivemapper’s dashcam, then you can complete data collection while driving and earn token rewards called HONEY at the same time. Once such a global map is completed, its API will become usable and users will need to use HONEY token to gain access to the API. In this way, a commercial loop is formed.
Another Drive to Earn project CPLE (CarpoolsLifeEconomy) is dedicated to building a Web 3 Uber COMMUTE platform. The project also requires contributors to install a dashcam, on the basis of which they can earn token rewards by posting trip orders and completing them.
Type 5 : Cash the flow
The development of Web2 told us that the flow almost the most important element for a business to success and there are many opportunities to cash in it as long as the media traffic can be gathered. Take Tencent as an example, as we know WeChat and QQ are not profitable, but with the huge traffic of them, there are many profitable businesses could do for Tencent, including QQ music, Tencent video, Qzone, King of Glory and so on.
For Web3 as well, X2E projects with the ability of strong traffic attraction and user. retention. For example, Move to Earn project could develop an NFT trading marketplace in the future, and use that profits to subsidize the bonus pool. In fact, the process of buying virtual shoes for new Move to Earn users is a process to learn how to trade NFTs. This is a great way to set up a business.
We believe 2022 will be a great year for the X2E track. PAKA labs will support quality projects in this track. At the same time, we also would like to remind Web3 users to be aware of the X2E risks, because of its low entery barriers. However, we believe the programs that succeed in creating an sustainability X2E model are the ones that will survive, and even make another brilliant in a new wave of growth.
PAKA is a DAO Venture co-founded by a group of Polkadot parachain initiators, aiming to discover and help innovative teams in the Polkadot and other Web 3 ecosystems. We hope to bring our experience in entrepreneurship and technology to help the next generation of entrepreneurs through the form of DAO while promoting the vision of Web3.0.