Thoughts on X-to-earn

One of the hottest concepts at the moment would be no other than X-to-earn (also called X2E). As the move-to-earn project StepN achieved huge success, a series of learn-to-earn, sleep-to-earn, eat-to-earn projects have also started to gain popularity in the market. X2E is considered to be a brand new model of value creation and distribution, for it often has a prototypical version in Web2. As a matter of fact, the general concept of X2E has been around for quite a while, from stake-to-earn in DeFi, to the Axie-led play-to-earn fever in GameFi. However, the new X2E model is more of a direct migration from Web2 to Web3, in addition to those two above. We’re going to take a look at how Axie Infinity started to take off, and continue to probe into the future possibilities of X2E.

1. Market Background

The new X2E model represented by GMT cannot be simply categorized into the GameFi sector, as it is not just another play-to-earn (also called P2E) model like Axie Infinity. Its market performance closely resembles that of two sectors.

Transition from Bull to Bear Market Introduces Waves of Conceptual Innovation

Since the middle of 2021, the market has no longer been surging upward with as much momentum as it once had. Rather, it has witnessed a merry-go-round of conceptual innovation. With the official launch of Axie’s AXS token on June 22nd, 2021, the GameFi sector popularized quickly and attracted a large number of users. This frenzy continued all the way through mid-November, when most GameFi projects started slowing down. After that, Metaverse began to take off in October, public chain launched in November, followed by the boom of PFP NFTs and the recent X2E projects.

Although these sectors differ from one another, they are all a part of an ongoing round of conceptual innovation. What they have in common is that, after the sector’s popularity declines, relevant token prices would gradually fall, with assets of top projects starting to shrink, and those of non-top projects slowly reducing to zero.

The juggling of concepts reflects an important trend of the current market — to brace for major downturns brought by the impending bear market. This trend has three main characteristics:

• Sensationalist conceptual innovation has taken center stage. A series of concepts such as “P2E”, “metaverse”, and “scaling”, while having extraordinary significance in its application, creates strong sensation for the market, and thus became where capital swarms in for profit.
• Profit-seeking purposes dominate newcomers to a certain sector. With the current market emphasis on growth, whether they are private investors or financial giants, project participants or token buyers, profit seeking has become one of their most important motives for entering into a sector. For this reason, token performance and user profile are important tools for analyzing current market trends.
• Different concepts in different sectors are related to one another. There are many P2E projects that transitions into metaverse projects later on. P2E and X2E projects also have some relations.

The Not-So-Correlated P2E and X2E

Back to our discussion on P2E and X2E — let’s take top projects, Axie and StepN, as examples. P2E peaked from June to November in 2021, while X2E started to popularize since March this year. The two have a long time interval in between, and their market performance does not have a strong correlation. It proves to a certain extent that the market does not consider these two conceptual sectors to be of the same nature. This market perception is actually developed through some core differences between these two concepts, especially their top projects, Axie and StepN.

2. Similarities & Differences: P2E vs. X2E

a) User profile: A New Crowd for X2E

1) Axie Infinity

An Overwhelming Amount of Purely Profit-Seeking Players

Most of Axie’s main players and growth come from low-income countries, with a large proportion of professional profit-seeking players. As revenue declines, daily active users (DAU) growth also slows, which demonstrates the overwhelming number of purely profit-seeking players in Axie.

• According to the digital currency investment agency Delphi Digital, Axie’s DAU surged from 38,000 at the end of April 2021 to 252,000 in mid-June, with the majority of new users believed to be from the Philippines and Venezuela;
• A video titled “NFT gaming in the Philippines” with more than 453k views on YouTube directly points out that, in the Philippines, under the influence of the epidemic, nearly one-third of college graduates are unemployed. Even at work, the income from local physical labor is not even 2/3 of that of Axie. It is precisely because of this that Axie spread virally in the Philippines at that time, and everyone from students to elderly people joined the frenzy of Axie Infinity. After that, with the entry of various profit-seeking unions whose main purpose was to create profit, Axie’s users have practically become a playground of professional profit-seeking players (termed, “scholars”), who had little to no regard of playability.
• According to Naavik’s November 2021 project analysis report, as Axie’s gaming profit declined, its DAU growth slowed down to about 2 million. Axie Infinity players were mainly from low-income countries, with 65%-70% of users from Southeast Asia, and 55% of that from the Philippines. The number of “scholars” in this group is about 2.35 million, accounting for 60%-65% of total Axie players.

Playability as an Non-Essential Need

Naturally, playability is an important measure for a game. In the process of market development, improving playability and game quality have played a major role in promoting the success of some games. However, in terms of market recognition, playability tends to be a pseudo-demand in the short term. The reasons are as follows:

• As far as user profiles are concerned, if Axie is less playable but guarantees the same amount of profit, it can still succeed in the Philippines.
• In the traditional game market, the development of a high-quality game often takes several years, and would face the risk of slow sales. In addition, there are factors such as, difficult blockchain transformation of some types of games, and reluctance to participate from traditional big-name game manufacturers, which make it difficult for short-term P2E games to meet the standards of traditional game industry.
• The anti-cheating mechanism of blockchain games will directly affect profit. Since many games are limited by technology and costs, and the local content is not fully on the chain, it is difficult to prevent cheating. The underdevelopment of anti-cheating technology in many game projects also limits its success and life cycle.

In the short term, the gap between P2E and traditional games is still all too large.

2) X2E

While P2E is dominated by players from low-income countries, such as the Philippines, X2E users consist more of people who focus on health and personal growth. From the App Store download ranking of StepN in the figure below, it shows that StepN is at the top of the list in many developed countries in Europe and America. It did not display the same trends as Axie, in which players are mainly from low-income countries, and achieved success from a brand new user group.

We believe the key reasons to be the following:

• Delayed entry of profit-seeking capital: Because of StepN’s strict control of sports integrity and anti-cheating mechanism, the difficulty to mass operate has been increased, and anti-cheating has also hindered the entry of some professional profit-seeking gaming guilds. However, the entry of profit-seeking capital is hard to avoid completely.
• Impact of high-value individual players: This is a major difference from P2E projects. Because of the time cost required by GameFi, many high-value individuals do not actually join for profit, but often participate in the form of investing in NFTs or tokens. However, high-value individuals often have needs for fitness and learning. For such needs, the software itself is a recorder with auxiliary functions. Projects such as StepN and LetMeSpeak have attracted a group of people who have not previously participated in GameFi.

For many participants of P2E, it is not the emergence of Web3 that has created needs for them. Rather, it is people’s profit-maximizing mentality that drove them to turn to Web3 to meet their needs. Naturally, financial profit is a major motive for all participants of the project.

This was why, a while ago, the NFT market scaled back significantly after LetMeSpeak reduced its production and had lowered revenue. As the profit decreases, those who are more profit-seeking will be the first to exit the market. However, because the user group is not purely profit-seeking, the sensitivity towards profit change will also be lower than that of GameFi projects.

Therefore, the evolution of user profile is an important difference between X2E and P2E. This difference is partly due to project development, but also depends on the different abilities of P2E and X2E in meeting the needs of their users. From this point of view, the future expectations for X2E are higher than for P2E.

b) Life Cycle: Similar Ponzi Structures

1) Axie Infinity

Axie adopts a dual-token model, with the gameplay mainly centering on combat and reproduction. Its initial cycle model is shown in the figure below.

For the model of Axie Infinity, which is familiar to many, the key is its life cycle. Despite that it fluctuated during the development of the Ronin chain, changes in the token model, and the increase in application scenarios, its two main stages are:

• Originally lower-priced NFTs gradually increased their prices with the spread of memes and the entry of new players. After being reported in mainstream media, the continued rising cost of NFTs started to discourage the entry of players who have not yet entered.
• Less and less new players came in, while the early players gained enough profit and left the market, leaving the return on investment to decrease even more, eventually causing the price of NFT to go down.

Some projects may have the opportunity to enter into the next cycle in the future, while many others begin to lose momentum. This is the case for not just X2E projects but for most crypto projects. They start with an enticing metanarrative, with investors and early participants using their influence to perpetuate this narrative. After liquidity increases, early participants begin to profit and leave the market, forming a vicious cycle.

2) X2E — StepN & LetMeSpeak

Two top projects of X2E are StepN and LMS. StepN adopts a dual-token model, which resembles that of StarSharks, a recently popularized project, as opposed to that of Axie Infinity. It includes governance tokens ($GMT), which do not have a clear generating path to be the carrier of the economic bubble, and unlimited in-game tokens ($GST). LMS adopts the single-coin model and keeps the token price relatively stable within a range to keep the game output stable. However, whether it is StepN or LetMeSpeak, they have not been able to free themselves from the constraints of their basic economic models. The stability of capital and project performance still largely depends on the entry of new users and various ways to lock value within the platform. A more sophisticated design only delays the arrival of the life cycle, but does not get rid of the Ponzi structure itself.

From the perspective of economic model design, there are two directions towards which P2E projects can go. One is to move towards a model similar to DeFi, providing a gamified DeFi experience, such as DeFi Kingdoms. The other is to go towards an internal economic cycle system that more closely resembles the economic model of Web2 itself. Only through the NFT and FT mechanisms can it provide a way of asset confirmation and exchange of external stable coins. More and more projects are beginning to combine the two paths, and gradually introduce the established game parameter settings into the calculation of profitable return, which would make the calculation more difficult and increase the proportion of reinvestment. If you only look at StepN’s settings for shoe parameters, earning mechanism, and the design of the reinvestment mechanism, you will find them practically the same as the P2E economic model except for the earning mechanism.

3. Future of X2E

a) Key to Sustainability: spread of memes is still its key, with continuous delivery and viral spread being important means to keep up momentum

Looking back at the rise and fall of P2E and the emergence of StepN, we can see that the two are both similar and different. The core similarity is still the sensation brought by memes, with fuel added from the market hype and Ponzi structure. The key to make money here does not depend on one’s status as a speculator or player, but more on the timing of one’s entry. For a project, the Ponzi structure and economic model are the engine of the economic system, and the capital brought by the spread of memes serves as fuel.

However, the book “Narrative Economics” has already pointed out for us that the spread of memes is similar to that of viruses, showing an upward spreading trend at first, but only lasting for a limited period of time. With the decline in the popularity of memes, the amount of new users will decrease. Once supply and demand become imbalanced, X2E projects will face the life cycle experienced by Axie.

But because of the following characteristics of X2E, its peak may be much higher:

• Evolution of User Profile: X2E has already successfully attracted the entry of new types of users. Compared with P2E users, user profile has been updated, and the sensitivity towards financial return of such users is reduced. In addition, StepN’s players actually have better purchasing power and real demands due to their large portion coming from developed countries. If the purchasing power related to real demands is directed channelled into StepN, it is possible to avoid the fate of Axie.
• Conceptual Advantage：As an emerging idea that may bring revolutionary changes to Web3, X2E’s creativity level is higher than that of P2E, and its execution is more doable than that of Metaverse.
• Improvement in Profiting Methods: The introduction of concepts such as “health” and “learning” enables some of the profitability models of Web2 products to be adopted by X2E products. For example, some X2E products are having attempts at advertising, co-branded NFT running shoes, in-person events, etc. The introduction of external cash flow is conducive to balancing the internal economic cycle. Judging from product design, X2E products are closer to the prototypes of top Web2 products. Many Web2 profitability models, which GameFi has not been able to learn from, will be more likely to be realized on X2E.
• Mature Referable Experiences: The success of X2E requires a combination of the mechanisms and experience of Web2 products, GameFi, and DeFi. It can learn a great deal of lessons from many types of prior products, significantly lowering the cost of trial and error.
• The new generation of project teams has stronger delivery abilities and smaller gaps with web2 applications：According to the figure below, the StepN app has been updated 10 times in 90 days, entering into the top 100 in the “Fitness and Bodybuilding” category multiple times.

The sustainability of X2E largely depends on whether it can maintain stability through continuous meme spread and data correction. Therefore, the X2E model has a very high demand for the delivery ability of a project team. As X2E products gradually adopt the profit model of Web2, while providing an even better user experience, some products of Web2 would also become its competitors. The centralized value distribution mechanism directs the value created by users’ activities on Web2 products towards the platform. Web3’s new distribution mechanism provides further economic incentives for the value created by user activity. Competing with the corresponding Web2 products, rewriting the structure of value distribution, and using decentralization to revolutionize the centralized distribution in the Web2 era are ramping up for a historical step of X2E to truly become a revolutionary model.

b) The Last Step of StepN

The ability of professional profit-seeking capital to extract funds from Axie Infinity is much higher than that of StepN’s individual players, therefore, the capital being brought in would be accounted for Axie’s rapid growth and collapse. StepN attracts individual players to re-invest by designing a complex token mechanism. Maintaining natural growth would mean limiting the growth rate of StepN, but this restraint has brought updates of user profile and delay in its bleeding out. However, looking at the current situation, once the individual users come in, with the rise of NFT prices and hardship in gaining more public attention, it is still difficult for StepN to rid itself of the restrictions brought by Ponzi structure. It will then soon begin its demise. StepN recently disclosed that its DAU is between 200,000 to 300,000, while Axie’s has reached 1.95 million by October 2021. The large gap in their DAU signifies that its pursuit of natural growth is relatively good. Therefore, despite also having strong background support and high levels of market attention, StepN is obviously not yet sharing comparable success with Axie in terms of DAU, which means that it still has the opportunity to open up for the entry of profit-seeking capital and achieve rapid growth, similar to that of Axie. Naturally, when it does, it also officially enters into the closing phase of the life cycle Axie has gone through.

4. Conclusion

By taking a look at the largely popularized concepts, we can conclude that the viral spread of memes plays an important role in gaining huge success for a project.

• According to Narrative Economics, memes will gradually lose their popularity if they do not constantly dish up in new forms.
• Epidemiology tells us that old epidemics may recur after mutation, as the remnants of old epidemics mutate or respond to changing circumstances, giving rise to new infectious diseases.

An outstanding narrative may sit still for a few years, but all of a sudden starts to flourish and gain success. From this perspective, in the crypto field characterized by Ponzi structures, the market will continue to look for new narratives, whether it is an old one with a makeover or a brand new idea. For existing X2E projects, constant renewal can provide stable momentum for their development. For other potential entrepreneurs in the market, some ideas are no longer under the spotlight, but are not forgotten and most definitely possess potential. A mindful entrepreneur may be able to discover and popularize them again. If you believe you have a good idea, feel free to contact us and let’s make it happen together.@0x_henry

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