Running turns into "running away"? Explaining why the collapse of STEPN is inevitable from the perspective of token economics

Author: Vader Research

Compiled by: Mary Liu

This article explains in a token economics, data-driven way why the Move to Earn app STEPN craze can't stop the collapse of GMT, GST and sneaker prices. Game developers and early investors may eventually become rich, and the STEPN brand may still have some value, but we believe that this cannot support the price of GMT, GST and sneaker NFTs in the long term.

Having previously analyzed the token economics of Axie Infinity , Pegaxy , Thetan Arena , Luna and predicted their collapse, we are very confident that STEPN’s model is also unsustainable and that GMT, GST and sneaker prices will eventually collapse.

About STEPN

STEPN is a money-making fitness app that rewards users with cryptocurrency for daily outdoor exercise, with over 500,000 daily active users and $8 billion in transaction volume. STEPN has a dual-token economic model similar to Axie Infinity: GST (SLP) is an uncapped utility token, and GMT (AXS) is a governance token with a cap of 6 billion.

Users need to buy virtual sneaker NFTs to start earning GST through daily activities. STEPN does not primarily sell sneaker NFTs, they are minted by existing sneaker NFT holders, who can mint new sneaker NFTs by paying the minting cost set by STEPN - similar to Axie's cultivation cost. The minting cost is usually denominated in GST and GMT - which is then destroyed.

Revenue Model

The amount of GST a user can earn daily depends mainly on the number of sneakers each user owns, but there are other factors, such as sneaker level, rarity, attributes, type, attached gems, etc. The amount of GST a user can earn daily is limited by daily energy.

To maintain or increase GST revenue, users should continually reinvest GST back into the ecosystem, such as repairing shoes, upgrading levels, buying gems, etc. - all with the expectation that they will earn more - "If I buy this $10 gem now, I can earn $30 more in the next 15 days" or "If I don't spend $5 to repair my shoes now, I will earn 20% less later." These are textbook behavioral economics strategies that can motivate users to make purchasing decisions.

Let's look at the earnings data.

A STEPN user with 3 regular sneakers can earn a net income of about 20 GST per day after spending money (repairs, upgrades, etc.). Every time a sneaker is minted, about 200 GST is burned. The GST payback period for sneakers is 30 days (3 sneakers*200 GST/20 GST).

In a given year, each pair of sneakers generates a net of 2,200 GST. In other words, each new pair of sneakers creates 2,200 GST inflationary pressure on the eco-economy. The current price of sneakers is about 5 SOL, slightly higher than the minting cost of 200 GST. Assuming the GST price remains unchanged, the 1-year return for sneaker buyers or minters is about 10 times.

Let’s analyze it carefully

We assume that the average user owns 3 common sneaker NFTs, but this is not the case because there are various sneaker rarities and a user may own more/less than 3 sneakers - which may result in higher/lower net GST generated per user. That said, these numbers are more or less similar, and even with 3 common sneaker NFTs as an example, we can get a sufficiently accurate picture of the health of STEPN's token economics.

Ponzi Death Spiral

By now, it is clear that offering payback periods as low as 30 days and annual returns as high as 10x is not sustainable. But where do these gains come from?

As seen in every Ponzi scheme, the gains come from new capital inflows - for STEPN these are new sneaker buyers/minters; their sneaker purchases/mintings translate into more GST burn, which in turn translates into higher GST prices, leading to higher returns for sneaker holders.

The main killer of every Ponzi is a reduction in new capital inflows, because every Ponzi is fueled by new capital inflows. If a Ponzi scheme runs out of new capital inflows, it collapses. If STEPN's sneaker minting growth slows, GST prices will gradually fall, leading to lower returns. Therefore, its economy relies on new capital inflows to maintain returns (and GST prices).

The larger the Ponzi, the harder it is to attract daily new capital inflows to maintain returns. For example, “Instead of paying 1,000 users $10 per day, now we have to pay 1 million users $10. So instead of $10,000 of new capital inflows per day, we need to attract $10 million.” This number grows exponentially as the Ponzi grows.

Therefore, a Ponzi scheme can continue for a relatively long time if growth is somewhat controlled, which happens to be what STEPN has been doing.

STEPN has been limiting the number of new users that can enter the ecosystem with invitation-only activation codes, which has also led to the growth hype around STEPN.

However, as user numbers mature, the real challenge begins once the need for controlled growth dries up.

STEPN needs to find more users to maintain the Ponzi economics, and there are two warning signs that STEPN is already struggling to grow; activation codes and guilds. Activation codes used to be hard to get, but that has changed recently.

Let’s understand what happens once growth matures and slows:

Once the economy reaches peak user and strives to attract the same new capital growth, sneaker minting will decrease, and therefore less GST will be consumed. This will lead to more daily net GST minting, which will increase the circulating GST supply. As sneaker holders cash out the daily earned GST, the growing GST supply/inflation will create selling pressure on the GST price, causing the GST price to fall.

Sneaker prices are tied to GST prices because minting costs are determined in GST. Lower GST and sneaker prices will result in lower APY returns for shoe holders. This will lead to lower growth because now users may not want to take the risk with lower returns, and some existing users may even churn because other apps that imitate Move-to-Earn may offer higher returns. This death spiral will continue forever because GST can be minted infinitely like LUNA.

guild

STEPN communicated plans that it would enable a delegation/lending model that would result in unions/speculators scaling sneaker NFTs and lending them to Scholars in low-income areas.

STEPN has an NFT shoe rental system, such as Axie Infinity Scholarship. Users without sufficient funds may not be able to purchase shoes. Therefore, users with sufficient funds can lend shoes to players who want to own sneakers to earn interest.

After recording over 18 podcast episodes with the Guild and writing over 30 pages of private research on the topic, we believe that the Guild will extract value from the STEPN economy and make it even less sustainable. Why?

Guild = Scholars

Existing STEPN users may spend on some rare items because they can afford to buy virtual sneakers that cost more than $1,000 in the first place, but Scholars do not have the financial ability to spend $1,000 on virtual sneakers. They treat the game/exercise activity as a job. For them, running 40 minutes on STEPN and earning $4 a day is another income, rather than driving 40 minutes Uber and earning $3. Scholars are in a very tight financial situation and usually cash in the daily GST earned as soon as possible to subsidize daily expenses.

Allowing guilds to participate in STEPN is like walking with the devil, they will bring much needed short-term working capital and will artificially inflate DAU data, but the long-term economic impact of inviting guilds will be irreversible.

Unit Economics

Before I get into the bull case, I want to introduce a framework for business sustainability. At a very high level, a business is sustainable if the revenue exceeds the unit cost. Common metrics used to evaluate unit economics are Lifetime Value (LTV) and Customer Acquisition Cost (CAC).

I developed a free mobile game at home and released it on the App Store. I spent $100 on Facebook ads and acquired 100 users = I spent $1 ($100/$100) to acquire a new user. Therefore, the CAC is $1.

The average user plays for about 7 days and then starts to churn. The game has no ads but monetizes its users by selling cosmetics. The average player spends $1 per day on cosmetics → I make $7 from new users ($1*7). Therefore, LTV is $7.

It costs me $1 to acquire a new user, and I make $7 from that user → my profit per user is $6. This is a great cash flow business, and I should immediately invest more money in advertising to acquire more users.

Let’s assume that instead of $7 LTV is $0.5 → then this will not be a sustainable business because I will be losing $0.5 per user on every ad spend. This is a losing business and I should not be spending any more money on ads.

Unit Economics of STEPN

Let’s see how we can apply this unit economics framework to STEPN.

STEPN users are attracted and retained mainly through token incentives. In the previous section, we calculated that a STEPN user who owns 3 ordinary sneakers puts 6600 GST pressure on the economy in one year.

Therefore, STEPN's 1-year CAC for acquiring/retaining this user is 6,600 GST ($12,000). Unlike F2P mobile games, this is not a one-time expense, but an ongoing annual expense because if STEPN drops the token incentive to 0, the user may switch to another walking-to-earn app with a higher token incentive. Therefore, STEPN's 3-year CAC for acquiring/retaining a new user is 20,000 GST ($36,000).

At current GST prices, these CAC numbers then translate to $12,000 and $36,000. Anyone familiar with unit economics for consumer apps will know that these are astronomical CAC numbers.

STEPN is only sustainable if the revenue generated by a user over their lifetime (LTV) exceeds the CAC. Even a healthy ratio is a minimum of 3x LTV/CAC, and I'll admit that 1x is barely sustainable.

Let’s look at the revenue/LTV side. What are the existing and potential revenue channels?

• Marketplace Fees: Every time a marketplace transaction occurs, the economy collects a tax. This is typically a 5% tax. A user who owns 3 common sneaker NFTs typically pays 100 GST ($180) per year in marketplace fees to STEPN.
  

• Deflation Sink: The deflation sink is not yet activated, but we assume that users can buy custom sneakers/cosmetics sponsored by brands/influencers (Nike, Prada, etc.). This is a behavior driven by social signals and is very common in MMO games. The average Fortnite user spends $86 per year on virtual items. Just like the F2P industry, some players will spend thousands of dollars on deflation, while others will spend nothing. Let's multiply Fortnite's data by 10 times and assume that the average STEPN user will spend $860 per year on this.

• Ad Revenue: Consumer brands (shoe manufacturers, fitness equipment products/services), crypto applications (DeFi, GameFi, L2s), nearby retail stores (restaurants, grocery stores, retailers) are willing to advertise their products/services to STEPN users. Therefore, they are willing to pay for their attention. But how much will they pay? Meta received $242 in ad spend revenue from the average North American user. STEPN has a more targeted user base, so we assume that STEPN can generate 4x the revenue of FaceBook - $1,000 per user per ad revenue.

This gives an annual revenue per user of about $2,000. We are still over $5,000 away from CAC. Let’s add a 66% premium for life insurance revenue, sweepstakes/lottery, retail referral revenue, and other ideas, and annual revenue per user is $33,000. Based on these numbers, the unit economics are clearly unsustainable, as the 1-year LTV is $3,300 and the CAC is $12,000.

Keeping in mind that these revenue figures are final state figures, the 2 main questions are:

• What is the probability that STEPN will achieve these revenue targets?
  

• More importantly – how long will they take?

The second question is critical because STEPN is a ticking time bomb. The longer it takes for STEPN to achieve these revenue targets, the more likely it is a Ponzi scheme, as STEPN will have difficulty attracting new capital inflows and competitors will offer better returns.

in conclusion

STEPN may be a good brand because it has built strong brand awareness, but we do not think it justifies GMT's value of over $6 billion because STEPN is currently running an unsustainable Ponzi scheme that will collapse along with GST, GMT, and sneaker prices. Additionally, ownership of GST, GMT, and sneakers may not allow for future success for the potential developer company or the STEPN brand.

Bear Market Case: In the context of a bear market, we believe that there is a 99.95% chance that STEPN's Ponzi scheme will collapse, and our valuation for GST is 0.

Bull Case: In a bull case, we believe STEPN has a 0.05% chance of becoming the ideal social/fintech/fitness super app and we value GST at $100 billion. Using a probability weighted average, our estimate for GMT's long-term target price is $50 million fully diluted market cap or $0.08 per token.