The Unbundling of STEPN's Hot Bod Summer
The fundamentals of an unstable popular M2E app
Pokemon Go shocked the world in 2016 by incorporating augmented reality with exercise. STEPN, the popular move-to-earn (M2E) app launched on Solana is going beyond that: They’re paying you to move.
The Background
STEPN was created with the goal of encouraging people to live a healthy and active lifestyle. The project received widespread attention in October 2021, after placing 4th in a major Solana hackathon.
The platform became available to the public in December 2021, in the form of an open beta, and raised $5mm led by Sequoia Capital at the beginning of 2022. In April of 2022, STEPN reached over 400,000 daily active users and has continued to grow at incredible rates.
The Premise
Purchase a pair of virtual sneakers (NFT)
Walk, jog, or run outdoors and earn GST, the in-game currency
Level up, accumulate more sneakers, and make money
The Economy
STEPN has a dual-token system with GST and GMT representing the utility and governance tokens respectively. GST is the token most people earn by simply moving, while GMT cannot be earned until the sneaker you’re using reaches Level 30, which can take months. An easy way to think of this is GST is like being paid a wage, while GMT is like being paid in equity.
GST has an unlimited supply and is earned by moving. GST is burned by minting new shoes, repairing shoes, leveling up sneakers, upgrading gems, or unlocking sockets.
GMT has a finite supply and can be earned by moving once you have Level 30 sneakers. 30% of GMT tokens will be released to users via this M2E feature, and to ensure this supply lasts, every 3 years, the GMT earned is halved. The remaining 70% of GMT tokens have been set aside for other purposes. Below is a chart taken from STEPN’s white paper showing the allocation of GMT.
The Absurd Returns
Daily GST earned is a function of the number of sneakers you own, sneaker level, rarity, type, etc. The cap on GST earned is set by a daily energy limit.
It’s fair to assume that most STEPN users have 3 common sneakers with average attributes. After repair costs and upgrades, you can earn around 25 GST per day. Minting a new sneaker costs around 250 GST, meaning the payback period is only 30 days (3 sneakers * 250 GST / 25 GST).
Let’s annualized this:
(365 days / 1 year) * 25 GST/day = 9,125 GST / Year
(9,125 GST / year) - (3 sneakers * 250 GST/ sneaker) = 8,375 GST / year
(8,375 GST / year) / 3 sneakers = ~2,800 GST / sneaker / year
Each year, you’re netting around 2.8k GST per sneaker per year. This means that every new sneaker minted creates a 2.8k GST inflation pressure per year. In a year’s time, you’re making 2,800 GST / 250 GST = ~11x return on your investment.
Note: As a result of the stepwise function of value created by the number of sneakers owned of 3, 9, 15, and 30, we are assuming most players will have <9 sneakers, resulting in our assumption of the 3 sneaker multiplier.
TL;DR: It takes 1 month to make back your initial investment and you’ll get a 1-year return of 1,100%.
The Downfall
These absurd returns are only possible due to new users entering the platform. GST has an unlimited supply and people earn it daily by moving. For this system to work, there needs to be a strong deflationary element to ensure the token value won’t collapse.
The problem with STEPN is that there is no real deflationary component. The only sustainable way to remove GST from the economy is to burn it when repairing your shoes, leveling them up, upgrading gems, etc. Burning GST appears to be deflationary, but in reality, the action is net inflationary.
You spend 5 GST to repair your shoes every day because you can earn 25 GST from doing so. In the economy, you’re subtracting 5 GST but also adding 25 GST, so the net effect is adding 20 GST. What seems like a deflationary element, is in fact an inflationary one.
You may be thinking if this is true, how is STEPN still alive? The answer is rapid user growth. When new users join the platform, they must buy sneakers, which raises the demand for sneakers. Because the demand is high, current users have an incentive to mint new sneakers and sell them to these new users. You burn GST to mint these new sneakers and so as long as user growth continues, GST will survive. It’s important to note though that the larger the project, the harder it is to keep user growth rampant.
There are many who have argued STEPN is a Ponzi scheme because both work as long as more and more people join it, with no real sustainable value created. Eventually, the music stops, and both STEPN and Ponzis collapse.
The team at STEPN is well-aware of this predicament and has already transitioned from open beta to an invite-only one. The team is trying to prolong the inevitable by keeping user growth constant and controlled.
The introduction of guilds and scholars will accelerate the pressure placed on GST. While guilds lower the financial barrier to entry, scholars generally come from developing nations and play the game as a job. The sole objective of scholars is to make money from the game. Guilds will provide the capital or equipment (rental system coming soon) needed for scholars to excel at the game. This reduces the rate at which new shoes need to be minted as one can share the many shoes they own. The only real deflationary element of GST is removed as a result, while the production of more GST occurs.
In the last 30 days, GST has fallen 93%, and I expect the price to continue to decline as a result of lower capital inflows from new users. This fall mimics Axie Infinity’s SLP price collapse, which I wrote about here. In both Axie and STEPN, the low incentive to burn the utility tokens has led to an oversupply of tokens and a steady decline in their value.
Trailing 30 days GST Price Chart
The Future
STEPN has amassed nearly half a million daily users and has built the largest M2E game in history. The electric growth STEPN experienced over the past few months has led to the absurd returns seen in the project.
The lack of an adequate deflationary element of GST is troubling and has led to an oversupply of the utility token and a destructive crash in its value. The capital inflows that led to high returns came from rapid and unsustainable user growth. While the team has taken steps to control token supply and user growth, the future of STEPN’s trajectory is falling.
While the economics of STEPN aren’t perfect, the project has been paving the way for more research and development into the tokenomics of Play-to-earn (P2E) games. As a pioneer in the M2E space, I applaud the goal of STEPN: “To build the best health and fitness app with the best incentives to stay healthy and socialize”.