Why STEPN’s Collapse Is Inevitable?
Fundamental Analysis on STEPN’s Token Economy
In this article, in a data-driven way we explain why the STEPN bull case arguments won’t prevent GMT, GST and sneaker prices from collapsing. The game developers and early investors might end up being wealthy and STEPN’s brand name might still have some value but we argue that this won’t be reflected in GMT, GST and sneaker prices in the longer-term.
Having previously analyzed the tokenomics of Axie Infinity, Pegaxy, Thetan Arena, Luna and predicted their collapses, we are highly confident that STEPN’s model is also unsustainable and GMT, GST and sneaker prices will eventually collapse.
STEPN is a move-to-earn fitness app that rewards users with crypto for daily outdoor exercises. It has more than 500k daily users and is trading at $8bn. STEPN has a dual token economy model similar to Axie Infinity; GST (SLP) is the uncapped utility token, GMT (AXS) is the capped governance token.
A user needs to buy virtual sneaker NFTs to be able to start earning GST through daily activities. STEPN doesn’t primarily sell sneaker NFTs, they are being minted by existing sneaker NFT holders who can mint new sneaker NFTs by paying a minting cost set by STEPN — similar to Axie’s breeding cost. Minting cost is typically denominated in GST and GMT — which are then burnt.
The number of daily GST that a user can earn is based mainly on the number of sneakers owned per user but there are other factors as well such as sneaker level, rarity, attribute, type, attached gems, etc. The number of daily GST earned per user is capped by a daily energy limit.
To sustain or grow the GST earnings, a user should constantly reinvest GST back into the ecosystem by buying inflationary sinks such as repairing shoes, increasing levels, buying gems, etc. — all with the expectation that they can earn even more — “If I buy this $10 gem now, I can make $30 more over the next 15 days” or “if I don’t repair the shoes now for $5 now, I will earn 20% less going forward”. These are textbook behavioral economics strategies to nudge users into making a buy decision.
Let’s look at the earnings figures.
A STEPN user with 3 common sneakers earns net ~20 GST per day after paying for the inflationary sinks (repairs, upgrades, etc.). Every time a sneaker is minted, ~200 GST gets burnt. The GST payback period of a sneaker is 30 days (3 sneakers*200 GST/20 GST).
That is net 2.2k GST minted out of thin air per one sneaker in a given year. In other words, every new sneaker creates a 2.2k GST inflation pressure on the economy. Sneaker prices are currently trading at ~5 SOL, slightly above the minting cost of 200 GST. Assuming GST prices are constant, 1 year return of a sneaker buyer or minter is ~10x.
Let that sink in.
We assumed that the average user holds 3 common sneaker NFTs, this could not be the case as there are various sneaker rarities and users might own more/less than 3 sneakers — which could potentially result in higher/lower net GST minted per user figures. That said, the figures are more or less similar and even using the 3 common sneaker NFTs as an example gives us a sufficiently accurate understanding of STEPN’s economic health.
Ponzi Death Spiral
By now, it must be obvious that offering a payback period as low as 30 days and an annual return as high as 10x is unsustainable. But where do these yields come from?
As seen in every ponzi, yields come from new capital inflows — for STEPN those are new sneaker buyers/minters; their sneaker purchases/mints translates into more GST burnt which translates into higher GST price and thus higher returns for sneaker holders.
The main killer of every ponzi is slowing new capital inflows as every ponzi is fueled by new capital inflows. If a ponzi runs out of new capital inflows, it will collapse. If STEPN’s sneaker minting growth slows down, GST price will gradually fall, resulting in lower returns. Thus, the economy is dependent on fresh capital inflows to sustain the returns (and GST price).
The larger the size of the ponzi, the more challenging it becomes for it to attract daily new capital inflows to sustain the returns. E.g. “Instead of paying out $10 a day to 1k users, now we gotta pay out $10 to 1m users. So instead of a new daily capital inflow of $10k, we need to attract $10m”. This number grows exponentially as the ponzi grows.
Thus, a ponzi could last relatively longer if the growth is somewhat controlled. And that is what STEPN has been doing. STEPN has been limiting the number of new users that can enter the ecosystem with invite-only activation codes which also resulted in a growth hacking style hype around STEPN.
However, the real challenge begins once demand for controlled growth dries up as the user count matures. STEPN needs to find even more users to sustain the ponzinomics and there are 2 warning signs that STEPN has started struggling with growth; activation codes and guilds. Activation codes used to be difficult to get access to but this has changed in the recent days.
Let me walk you through what will happen once growth matures and slows down
Once the economy reaches user peak and struggles to attract the same fresh capital growth %, there will be less sneaker minting and thus less GST will be burnt. This will result in more daily net GST minted which will add up to the growing circulating GST supply. As sneaker holders cash out the daily GST earned, the growing GST supply/inflation will create a sell pressure on GST price which will lead to lower GST price.
Sneaker prices are correlated to GST price since minting costs are determined in GST. Lower GST & sneaker prices will result in lower APY returns for sneaker holders. This will result in even lower growth as now users might not want to take the risk given lower returns and some existing users might even churn as other copycat move-to-earn apps might offer higher returns. This death spiral will continue forever as GST can be minted infinitely just like LUNA.
STEPN communicated plans that it will enable delegation/lending model which will result in guilds/speculators bulking up sneaker NFTs and lending them out to scholars in lower income countries.
Having recorded 18+ podcast episodes with guilds and written a 30+ page private research report on the subject, we argue that guilds will extract value from STEPN’s economy and will make the economy even more unsustainable. Why?
Guilds = Scholars
Existing STEPN users might potentially spend on deflationary sinks since they can afford $1k+ virtual sneakers in the first place but scholars don’t have the financial means to spend $1k on virtual sneakers. They treat the game/exercise activity as a job. For them, earning $4 a day by running 40 minutes with STEPN is an alternative side income gig to earning $3 a day by driving 40 minutes with Uber. Scholars are very tight with finances and will typically cash out the daily GST earned as soon as possible to pay for their cost of living.
Enabling guilds to participate in STEPN is like lying down with the devil. They will bring the much needed short-term working capital and will artificially inflate DAU figures but the long-term economic implications of inviting guilds will be irreversible.
Before going into the bull case arguments, I’d like to present a framework on the sustainability of a business. At a very high level, a business is sustainable if the earnings are more than the expenses on a per unit basis. The common metrics used to assess the unit economics is Lifetime Value (LTV) and Customer Acquisition Cost (CAC).
I develop a free-to-play mobile game at home, publish it on App Store. I spend $100 on Facebook Ads and acquire 100 users → It costs me $1 ($100/100) to acquire a new user. Thus, CAC is $1.
The average user plays the game for around 7 days before churning. The game doesn’t have ads but monetize users by selling cosmetics. The average player spends $1 a day on cosmetics → I make $7 ($1*7) from a new user. Thus, LTV is $7.
It costs me $1 to acquire a new user and I make $7 from that user → profit per user is $6. This is a great cash printing business and I should immediately spend more on ads to acquire more users.
Let’s assume LTV is not $7 but $0.5 → then this wouldn’t be a sustainable business as I would be making a $0.5 loss per user on every ad spend. This is a loss making business and I shouldn’t spend more on ads anymore.
STEPN’s Unit Economics
Let’s look at how we can apply this unit economics framework to STEPN. STEPN users are mainly attracted and retained by token incentives. In a previous section, we calculated that a STEPN user with 3 common sneakers put 6.6k GST worth pressure on the economy in a year.
Thus, STEPN’s 1 year CAC to acquire/retain that user is 6.6k GST ($12k). Unlike F2P mobile games, this is not a one-off expense but an ongoing annual expense because if STEPN cuts the token incentives to 0, the user will likely churn to another move-to-earn app with higher token incentives. Thus, STEPN’s 3 year CAC to acquire/retain a new user is 20k GST ($36k).
At the current GST price, these CAC figures translate into $12k and $36k subsequently. Anyone who is familiar with the unit economics figures of consumer apps would know that these are astronomically high CAC figures.
STEPN can only be sustainable if revenue generated from a user throughout its lifetime (LTV) could exceed CAC. Even though the healthy ratio is minimum 3x LTV/CAC ratio, I would be convinced by a 1x ratio.
Let’s look at the revenue/LTV side. What are the existing and potential revenue channels?
- Marketplace Fees → Every time there is a marketplace transaction, the economy charges a tax. This is typically a 5% tax. A user with 3 common sneaker NFTs typically pay 100 GST ($180) in marketplace fees per year to STEPN.
- Deflationary Sinks → Deflationary sinks are not active yet but let’s assume users can buy customized sneakers/cosmetics sponsored by brands/influencers (Nike, Prada, Kanye West, etc.). This is a behavior driven by social signaling and very common in MMO games. Average Fortnite user spends $86 per year on virtual items. There will be players who spend thousands and ones who spend nothing on deflationary sinks just like in the F2P industry, let’s 10x Fortnite’s figures and assume that the average STEPN user will spend $860 on deflationary sinks in a year.
- Ad Revenue → Consumer brands (shoe manufacturers, fitness equipment products/services), crypto apps (DeFi, GameFi, L2s), nearby retail shops (restaurants, groceries, retailers) would love to advertise their products/services to STEPN users. Thus, they would be wiling to pay a price for their attention. But how much would they spend? Meta generates $242 ad spend revenue from an average North American user. STEPN has a more targeted user base so let’s assume STEPN can generate 4 times what FB — $1k per ad revenue per user.
That makes ~$2k annual revenue per user. We are still $5k+ short of CAC. Let’s add a 66% premium for life insurance revenue, raffles/lotteries, retail referral revenue and other ideas and we get to $3.3k annual revenue per user. Based on these figures, the unit economics is clearly unsustainable as 1 year LTV is $3.3k whereas CAC is $12k.
Keep in mind that these revenue figures are the end state figures. The 2 main questions are
- What is the probability that STEPN can achieve these per user revenue targets?
- And more importantly — how long will it take them?
The 2nd question is critical as STEPN is a time ticking bomb. The longer it takes STEPN to achieve these revenue targets, the higher probability the ponzi can collapse as STEPN will struggle to attract new capital inflows and competitors will offer better yields.
STEPN could become a good brand as it already has built strong brand awareness but we argue that this doesn’t justify GMT to be valued at >$6bn as STEPN is currently running an unsustainable ponzi which will collapse alongside GST, GMT and sneaker prices. Additionally, ownership of GST, GMT and sneakers may not grant exposure to the future success of the underlying developer company or the STEPN brand.
Bear case; we think there is a 99.95% chance that STEPN’s ponzi will collapse, our bear case valuation for GST is $0. Bull case; we think there is a 0.05% chance that STEPN could become the desired social/fintech/fitness superapp, our bull case valuation for GST is $100bn. Taking a probability weighted average, our estimation for GMT’s long-term price target is $50m FD market cap or $0.08 per token.
None of this is financial advice. If you want to learn more about Web3, follow Vader Research on Twitter and Spotify. If you want Vader Research to consult with your team on tokenomics, economy management and investment management, please reach out on Twitter.