Why STEPN’s Collapse Is Inevitable?

STEPN

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.

Earnings

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.

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?

Guilds

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.

Unit Economics

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).

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.

  • 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.
  1. And more importantly — how long will it take them?

Conclusion

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.

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Vader Research

Web3 Game Economy & Token Design Consultancy dedicated to the long-term development of Blockchain Gaming. Follow us on Twitter @DeFiVader