Are all Play to Earn games a Ponzi scheme?

In the early 1920s, Charles Ponzi implemented a fraudulent investment program that netted him nearly $20 million (about $258 million in today's value). His modus operandi was to offer high returns to investors, and all he did was take money from new investors to pay for early investors. Since then, similar schemes have been colloquially known as Ponzis scams.

A Ponzi scheme is defined as "investment fraud that pays existing investors with funds collected from new investors". In such schemes, investors pay a fee to a general manager who promises them high returns. The money paid to these investors comes from payments from later investors. The structure has no legitimate source of income other than the income funds of the new entrants.

This model is unsustainable and relies solely on external funding to enter. When there are no new investors, the plan collapses, leaving investors, especially new investors, out of their own pockets. Ponzi schemes have been widely denounced as unethical by regulators such as the SEC and have been severely cracked down.

Play to Earn Games and its close connection to Ponzi schemes

The 21st century has seen the advent of Play 2 Earn ("P2E") games, characterized by a sharp rise in popularity in games such as Axie Infinity. In 2021, Axie Infinity's trading volume reached a staggering $3.5 billion, and its native token $AXS grew by 18,000%. The game is particularly popular in countries such as the Philippines, where players can easily earn a higher income than the local job pays.

P2E games often have a low initial barrier to entry and huge profit potential, bringing a new viable way for players. It offers life-changing opportunities, especially for participants in low-income countries. Arguably, they are the modern force of goodness. Still, there is no shortage of critics who criticize P2E games for being a Ponzi scheme. While a large part of this is undoubtedly due to the general fear caused by the public's lack of understanding of the crypto and P2E spheres, there are very valid arguments that the P2E game is indeed a house of cards that could collapse and cause thousands of people to be burned financially.

For the inexperienced, here's a very streamlined example of a P2E game: we call it Game ABC. The starting cost of participating in the game is to purchase an NFT for $100. Players can then earn 100 tokens per day (worth $0.01/token). These tokens are used to participate in the ecosystem of games, such as upgrades, upgrades, etc. Players can reinvest tokens into the game or cash them out for a profit.

From the beginning, it looked like a fairly innocuous model. But where do these users get their money to cash out? Most games launch liquidity pools when they are released, often pegging game tokens to stablecoins such as USDC. Players can redeem game tokens for USDC and vice versa. This will guide the player to start the initial fluidity of the game. As the game progresses, liquidity pools are often self-sustaining through player buying and selling, adding to the flow pool, and growing.

For the most basic P2E games, the profitability of this model depends on the constant addition of new players. However, the threat of falling demand is very real – probably due to the oversatuation of the P2E market. The result is that the liquidity pool does not grow, but is depleted by players who wish to cash out. It's often a zero-sum game – early investors accept it all, while new players don't get a healthy return on their investment.

Does this mean that all P2E games are inherently unethical and an absolute Ponzi scheme? We don't believe it and will cover the factors that make P2E games unsustainable and how the game can overcome that.

Token economics affects the sustainability of the game

The basic concept here is simple; supply and demand. As the demand for payments grows, so must revenue, and vice versa. This is essentially token economics, or "token economics." Tokenomics describes "the mathematics and incentives for managing crypto assets," which encompasses the mechanics of assets — from use cases as demand drivers and destruction mechanisms that reduce supply, to psychological and behavioral factors that affect value. Assets over time. Good token economics is essential for the long-term success of a project. Without elaborate token economics, inflation in game tokens would spiral and lead to crashes and burns.

· Supply: A token oversupply reduces the value of each token.

· Demand: Insufficient demand will cause players to cash out their tokens at any possible moment, causing the value of tokens to fall rapidly

Before we can discuss it further, we need to understand what a liquidity pool is and why it is essential for P2E gaming. Liquidity pools are essentially "pools of cryptocurrencies or tokens locked in smart contracts to facilitate transactions between assets." Let's look at an example:

· There are 10 Token X and 10 USDC in the liquidity pool. In this case, 1 Token X = 1 USDC.

· When a user converts Token X to USDC, the price of Token X decreases and vice versa. Example: If a user exchanges 5 Token X for USDC, the price of token X corresponding to USDC in the pool drops to 0.80 USDC / Token X.

To avoid the rapid drain of liquidity pools and retain the value of game tokens, the goal is to incentivize players to spend (burn) or hold their tokens. The benefits here are twofold. First, it triggers demand through the token's burning mechanism – thereby reducing the available supply. Second, it avoids drainage from liquidity pools. With this in mind, it is crucial to have sufficient token use cases and a burning mechanism. The purpose of this is to reduce the supply of tokens and create demand for them. If P2E games lack dynamic management of the payout mechanism, then there is no reason for players to want to hold their tokens. Some examples of spending mechanisms might include upgrading items, buying cosmetics, and various other microtransactions.

Red Flags: Show that the game of A Ponzi scheme is not sustainable

At the end of the day, a game that doesn't seek to balance the income of new and old players but relies only on the income of new players is structurally similar to a Ponzi scheme. Here are some of the ways the game can't do that.

Poorly designed token economics

Referring to the above explanation of token economics, game developers need to structure their token economics in a way that balances supply and demand. Unsustainable games often have the following red flags.

· Limited use cases for tokens:

· Players are encouraged to cash out and deplete the liquidity pool

· Failure to provide a burn mechanism to reduce the supply of tokens

· Poor distribution models favor private investors rather than actual users.

· Investors are not interested in using these tokens and are more likely to sell them (thus affecting the liquidity pool)

· The limited or no vesting period for private investors is a strong sign that the project is preparing to pump and sell its tokens

The "ending" is too easy to reach

Getting too easy to reach the final game can cause players to get bored and choose to cash out. The reason many of us play the game is because of a sense of accomplishment. Runescape, for example, is the largest massively multiplayer online role-playing game (MMORPG) that has created more than 200 million accounts. The game caters to players of all levels, from consumers to free-to-play users. To get a fully maximized account, users will have to spend months or even years playing the game. Even so, only a handful of players have reached this milestone (9,712 as of 2020). This means that for the vast majority of players, there is always something to do in the game to progress, and there is a goal to work on.

If a P2E game makes it too easy for too many players to reach this "full" stage, it will leave these players with no goal to work hard, inevitably leading to them constantly cashing out from the game. If this happens too early, it will destabilize the game's economy even before it starts running.

The game is not fun at all, but the promotion is unusually high returns

The essence of the game is that it is fun and enjoyable to play. Without a strong gaming base that creates fun for players, the only reason people play games is to earn tokens to cash out. Again, constantly cashing in is unhealthy for the game economy.

If a game isn't fun at all, they're likely to rely on revenue to attract users. Such games often seek to reward users with unusually high rewards at the expense of the sustainability of the game.

The current state of the P2E game world is rather bleak. There are so many P2E games that flood the market, and it's fair to say that they're not actually games — but weak platforms that promise to pay with just a few clicks. This model may apply to the first few P2E iterations where new users aren't smart, but that's only because the lack of competitors and success stories created the initial hype. Now, however, the cryptocurrency space is in the middle of a dime in P2E games, many of which are trying to take advantage of the hype of P2E to make money quickly. In order to succeed in this environment, the game needs to be carefully designed and encouraged to continue playing.

Strike a balance between profit potential and Ponzi nature

After all, at the end of the day, is it really possible for a game to reduce the level of Ponzi that currently plagues most P2E games while maintaining its profitable potential? Absolutely.

The biggest drawback is actually that in most game development companies. Many of these companies are familiar with creating traditional games and don't think P2E games are much different. However, they were dead wrong. P2E games require a lot of time and investment from the team, especially in terms of the liquidity and sustainability of the game token. Even if things go well, the team still needs to actively monitor the situation and step in if necessary.

Drive sustainability in P2E games

Powerful token economics with active management

Due to the overall volatility of the token, it is crucial that developers invest time in actively monitoring their tokens early in the game's release.

Examples of good token economics include enough token "sinks" to ensure that players need to continue spending tokens to sustain demand, robust burning mechanisms to control token supply and dynamic management of token minting.

Bring real value to your users

Obviously, games that focus only on making money are not sustainable. This is because the value of their crypto assets is directly related to their earning potential. So, in order for a game to be sustainable, it needs to provide value, not just make money.

Another layer above the revenue potential is the intangible value of crypto assets like NFTs. This refers to how much cultural, aesthetic or social benefit it brings to the holder. The value of in-game items is increased by games that cleverly give them intangible value. This pushes up the market value of these items without increasing the consumption of liquidity pools, but rather increasing liquidity. Without intangible value, the overall value of these crypto assets would decline over time – leading to an in-game economic collapse.

Therefore, developers should ensure that the game is not only enjoyable, but also provides value to the user in addition to the accompanying monetary rewards. Some examples include networking within the gaming community, mental health benefits, and even cognitive development.

The 2021 Gamestop stock saga is a testament to the power of the community. In any case, this can only be called an extremely risky investment. Still, there are hordes of people who choose to do so. A strong reason (as the resulting "ape-man strong" means investing in Gamestop means joining the Diamond Hand community movement to staunchly oppose the monopoly of the Big Fish on Wall Street. Another example of how joining a community can add value is Crossfit. Research shows that one of the main reasons for Crossfit's astonishing success is that it has succeeded in creating a sense of community and culture that makes users proud of their sense of belonging. Associate it with P2E games and create a strong community where players can make friends or even an online home that encourages them to keep playing – which is good for the longevity of the game.

Take STEPN as an example.

StepN's focus is on bringing intangible and tangible value to users, targeting applications in such a way that users are rewarded for performing core activities they are already doing — walking around.

STEPN, where multiple receivers exist to ensure that token demand remains ongoing, including but not limited to – post-use repair sneakers, upgrades, and minted sneakers.

The earnings side can motivate players to stay active (of which fitness incentives are a core issue around the industry). By moving, users are able to stay active and enjoy the health benefits that come with it. In addition, an upcoming feature is the purchase of carbon offsets from the game's profits, which will be decided by existing user votes. This adds to the feel-good aspect of the game, where users can not only make money, but also fight against global warming at the same time.

Use the joint curve mechanism to manage the game economy

Developers can use the union curve to manage the supply of in-game items. While the idea of a joint curve hasn't been proven due to the early stages of P2E gaming, it could be a viable solution. In short, the federated curve pegged the supply of tokens to a linearly rising price. The greater the supply, the higher the price. The game can use this concept not only for tokens, but also for other items in the game. For example, games can implement binding curves related to more elusive and rare items. Once a certain benchmark is reached, the joint curve will be activated, and the price of the minted item will subsequently increase as the supply increases.

The goal of STEPN is to eventually utilize similar principles, but with greater ease, this will be implemented gradually as the project evolves.

Looking to the future – bright and sustainable!

To reiterate, through well-designed token economics and value creation, it is clear that P2E games have the potential to be both sustainable and ethical. Its health depends on market forces and user sentiment. It will take a while for P2E games to break free from association with Ponzi schemes, but with the constant supervision and agile management of game developers, P2E games can easily maintain their longevity and be fair to all players.

STEPN attaches great importance to the useful life of the application and is taking proactive steps to maintain a balance between the game utility token GST and the governance token GMT.

The total issuance of governance token GMT will be halved every three years. The GMT revenue mechanism was recently published in the Community AMA and published in a white paper.

STEPN's user growth is not a challenge at this stage. With its real-world use cases and focus on the community, STEPN is looking for mass adoption. However, it is important that this growth is sustainable. STEPN doesn't shy away from making tough decisions. That's why STEPN even puts back the activation code system to ensure real and sustainable growth. The GST and GMT balance is always healthy and adds value to the ecosystem. STEPN is striving to be the best fitness app and serve the community in the best possible way!