How to build a sustainable X to Earn economic system?

Original Title: “How to Build a Sustainable X to Earn Economic System”

Original Author: MIDDLE.X, PAKA Labs

One of the biggest advantages of the crypto economy is the flexible design of incentive structures, allowing for the construction of any form of economic system with almost no constraints. In a crypto economic system, tokens are at the core of production relations and serve as important resource coordination tools. We have noticed a new token incentive model emerging recently, referred to as X to Earn. Here, "X" represents a specific user behavior encouraged by the system, while To Earn means the system provides economic incentives for that behavior.

Since the rise of Axie Infinity, Play to Earn has entered the public eye, even leading to the formation of large Web3 gaming guilds around it. Later, Move to Earn applications like StepN and Learn to Earn applications like LetMeSpeak also gained popularity, making people realize that the economic model of Play to Earn can have various variants and can be applied in more diverse scenarios, thus a broader concept was distilled: X to Earn.

Broad and Narrow Definitions of X to Earn

In a broad context, X to Earn can refer to any behavior that generates income in Web3, including:

• Using specific hardware devices (commonly referred to as mining machines) to connect to decentralized networks and provide services for income (e.g., mining activities of Filecoin, Menson, Phala, Helium), which some analysts classify as MachineFi;

• Running nodes for public chain networks to earn block rewards, including delegating tokens to nodes in PoS public chain networks for income;

• Investing funds in yield-generating DeFi applications for yield farming.

However, in this article, the X to Earn we refer to more specifically denotes its narrow meaning, where X represents a certain user behavior, emphasizing the user's time investment rather than capital investment.

Typical examples include:

• Play to Earn (Representative Project: Axie Infinity)

• Move to Earn (Representative Project: StepN)

• Learn to Earn (Representative Project: LetMeSpeak)

• Drive to Earn (Representative Projects: HiveMapper, CPLE)

• Write to Earn (Representative Projects: CoinHoo, CyberNote)

In addition, there are more novel and diverse forms, such as Sing to Earn, Sleep to Earn, Eat to Earn, Meditate to Earn, etc.

Commonalities and Individualities of X to Earn Projects

As mentioned earlier, in various forms of X to Earn projects, X is the variable, representing the behavior encouraged in the economic system, while Earn is the commonality, where the actions taken by users generate income in the form of tokens. Players can exchange token earnings for stablecoins either within or outside the app, or they can consume them within the system. Furthermore, the vast majority of projects share another commonality: players must first buy a "ticket" to enter the game to make money.

The ticket usually takes the form of NFT virtual equipment. For example, to earn income through StepN, one needs to purchase NFT sneakers, while to earn income through LetMeSpeak for learning English, one must first buy an NFT virtual character. In some projects, the ticket may also take the form of token staking (e.g., CoinHoo) or purchasing smart hardware (e.g., HiveMapper).

Is X to Earn a Ponzi Scheme?

Driven by speculation and profit-seeking motives, people flock to X to Earn projects, creating a significant outflow effect for such projects. However, participants generally harbor concerns about their sustainability, always preparing to exit while actively entering. Such concerns are understandable, and entrepreneurs in the field should consider: Can a sustainable X to Earn model be created? What should be done?

Just as life requires energy intake to maintain low entropy, an X to Earn economic system needs a continuous influx of funds to allow players to earn money.

The most natural way is the "first come, first served" model, where new users join to support older users, specifically, using the money from new users purchasing "tickets" to support the earnings of older users (which may involve injecting this money into a prize pool or used to stabilize the game token). This model is unsustainable, and we can provide a simple mathematical proof:

Assuming the expected monthly return for users is i, the ticket price is v, the number of existing users this month is s, and the number of new users is p, to maintain balance, the following must be satisfied:

i * v ≥ s * p * v

In other words: i ≥ s * p,

The minimum requirement is: i = s * p

Assuming users expect to break even in a month, meaning the expected monthly return p is 100%, and the initial number of existing users is 10, to maintain the equation's balance, the growth trend of users must satisfy the following curve:

It is not difficult to see that this is a typical exponential growth curve.

We can also understand that as the existing number on the left side of the equation increases, the incremental number on the right side must also increase proportionally to maintain balance, which means the increment must also maintain a certain growth rate. In other words, user growth must have sufficient acceleration; uniform growth is unacceptable.

If uniform user growth cannot be sustained, how can accelerated user growth be achieved? Such an economic system will soon fail due to diminishing returns, leading to an inability to meet expectations, causing players to exit, entering a death spiral, and becoming a Ponzi scheme. To create a sustainable X to Earn economic model, alternative, sustainable funding sources must be found. Let's analyze several possible avenues:

Five Possibilities for Sustainable Development of X to Earn

First: "Pay to Play"

Without external funding, an X to Earn economic system cannot ensure that every player makes money; if some make money, others must spend. If some are earning tokens, then some must be paying (here, paying refers to any form of payment, not just large amounts). If players are willing to pay, it indicates that such an economic system provides players with other values beyond profit-seeking: it could be the joy brought by the game, the development of good habits, or the opportunity to meet like-minded partners.

Taking Play to Earn model games as an example, if the game's appeal goes beyond just making money, and its playability can attract players to pay, or if players can accept that their earnings from grinding are less than their spending, then the game's economic system may achieve balance—between spenders and grinders. In this scenario, paying players are the true consumers of the game, while grinding players are, to some extent, serving the paying players with their time.

From a dynamic time perspective, it is likely an evolutionary process: in the early stages of the game's promotion, high returns attract many users to grind, but as time goes on, the slowing user growth leads to reduced grinding returns (often reflected in the declining token price), and some grinding users gradually exit, leaving behind paying users and a portion of grinding users who accept lower returns, thus forming a balance.

In this evolutionary process, the game publisher saves the funds that would have been spent on promotion and distribution, leveraging the power of the crowd for publicity. From this perspective, Play to Earn does not change the game; it changes the distribution method of the game—the key factor for a game's success remains its playability.

Second: "Lazy Pays for Diligent"

The characteristic of "lazy pays for diligent" is concentrated in Move to Earn and Learn to Earn projects. These two types of projects share a common feature: they use monetary rewards to help users combat inertia and become better versions of themselves. It is well-known that both learning and exercising require self-discipline. Self-discipline can be painful, but if self-discipline can bring immediate feedback in the form of monetary rewards, the situation may change. When learning or exercising becomes a grinding activity, it suddenly becomes invigorating!

Of course, without external funding subsidies, the issue remains: if some are grinding, some must be paying. On the surface, all participants earn token rewards, but assuming the total market value of tokens remains unchanged and excluding secondary market fluctuations, we can conclude: only those who outpace inflation are truly making money, while those who do not become passive paying users.

This situation is akin to everyone engaging in a grinding competition through exercise or study, ultimately resulting in relatively lazy players footing the bill for relatively diligent players, thus forming a balance.

In this balance, the paying users in the system are passively footing the bill rather than actively consuming. Although they benefit to some extent from self-discipline and must, in principle, accept the consequences of their relative laziness, their tolerance for losses is certainly limited. Therefore, the entire economic system must maintain a relatively mild level of stimulation, meaning it cannot allow losing users to incur excessive losses, and correspondingly, to maintain balance, it cannot allow earning users to make excessively high profits.

To achieve this, StepN's choice is to moderately limit the influx of new users and encourage users to consume their earned token rewards within the system to reduce inflation (but currently, we see that all token consumption scenarios within the StepN system almost all point towards earning more token rewards, which will increase inflationary pressure over time); while LetMeSpeak chooses to give the role NFT, serving as the entry ticket, a certain lifespan (visa period), making the economic model closer to the "check-in model" mentioned below.

Third: Check-in Model

I wonder if you have seen such a gym operating model: a gym annual card costs 2000 yuan, and every time you come to work out, you can get back 20 yuan. If you come 100 days, the annual card pays for itself; after 100 days, no more cashback. This is a counterintuitive incentive method, which has a greater motivating effect on customers' persistence in working out compared to most gym operating models. This model has already seen successful practices in physical commerce.

We call this model the check-in model, where the money each person can earn is simply the money they have already spent, eliminating the possibility of becoming a Ponzi scheme. Although it lacks the gambling thrill of grinding competitions, it also eliminates the risk of being exploited. Of course, there must be a certain scale of "lazy customers"; otherwise, no one will pay for the gym's operating expenses. Therefore, the check-in model can also be understood as another form of "lazy pays for diligent."

Proof of Meditation adopts the check-in model; it is a Meditate to Earn application. The usage of this application is straightforward: pay $100, then do 21 days of meditation training. Each time you complete a meditation task, you can get back $5 and receive a meditation badge NFT. At the end of the training, the principal is fully refunded; if the meditation training is not completed within the time limit, the unreturned principal will be forfeited. Currently, this project still belongs to an experimental product, and the number of people paying attention is not large.

Fourth: "Network Supports Points"

We find that some X to Earn projects have clear logical endpoints and profit models. After establishing the entire network through the X to Earn format, they can provide social services through the network and earn profits. As long as there are sufficient profits, funds can continuously flow into the prize pool or be used to buy back and destroy game tokens to raise prices. In this scenario, the profits of the entire network support the earnings of each individual point, and at the same time, participants in the network are not only value seekers but also value contributors.

HiveMapper is a Drive to Earn project with a vision to build a Web3 map product in a decentralized manner. Most of the map products on our phones today, such as Google Maps, Amap, and Apple Maps, are centralized products. In fact, the companies operating these products spend enormous costs daily, hiring specialists to collect and update geographic information, which only financially strong giant companies can afford.

HiveMapper, on the other hand, builds a global map using blockchain and data crowdsourcing. You only need to purchase and install HiveMapper's dashcam to collect data while driving and earn token rewards called HONEY. Once the global map is completed, users need to consume HONEY tokens to obtain API usage rights. This creates a commercial closed loop.

Another Drive to Earn project, CPLE (CarpoolsLifeEconomy), aims to build a Web3 Uber and ridesharing platform. This project also requires contributors to install dashcams, and based on this, they can publish itineraries on the platform and complete trips to earn token rewards. The project has limited public information, and more detailed operational plans are yet to be disclosed.

Fifth: Monetizing Traffic

The development of Web2 has repeatedly told us one thing: a continuously subsidized business may not lack value as long as it can gather traffic, and there are many opportunities for monetization. Advertising and cross-industry cooperation are among the most basic methods, while a more typical approach is to personally engage in developing cash cow businesses. For example, Tencent is well-known for its non-profitable WeChat and QQ, but leveraging the massive traffic from WeChat and QQ, Tencent has many profitable businesses, including QQ Music, Tencent Video, public accounts, QQ Space, Honor of Kings, and more.

The same applies to Web3; if X to Earn projects are operated well, they can possess strong traffic attraction and user stickiness, potentially becoming traffic entry points for more Web3 applications. For instance, Move to Earn projects can engage in NFT trading markets, using the Move to Earn module to drive traffic to the NFT trading market, subsidizing the Move to Earn prize pool with profits from the NFT trading market. In fact, the process of new users in Move to Earn purchasing virtual shoes is precisely the process of learning NFT trading; such business layout can be said to be a natural progression.

When we view Move to Earn applications, we should not see them merely as a Web3 version of Keep; from another perspective, they could very well be a Web3 version of Tencent or Meituan.

Conclusion:

We believe that 2022 will be a year of great prominence for the X to Earn sector, and PAKA Labs will actively seek opportunities in this sector to support quality projects. At the same time, we are also keenly aware that the entry threshold for the X to Earn sector is not high, and there will certainly be a large number of projects with improper intentions, cloaked in various flashy gimmicks, waving the banner of X to Earn, but in reality adhering to a Ponzi scheme mentality. Here, we remind Web3 users to stay vigilant and be aware of risks.

When various scams and chaos emerge in the X to Earn sector, it will bring disappointment to the market and may even attract severe regulatory scrutiny and sanctions from certain jurisdictions, leading to an overall downturn. However, we believe that those who successfully create sustainable X to Earn projects will survive and shine again in the next wave of growth. Among them, especially X to Earn projects that engage in traffic entry businesses will possess strong resilience and immense potential.

About PAKA

PAKA is a DAO Venture jointly created by numerous initiators of Polkadot's parachains, aimed at discovering and assisting innovative teams within the Polkadot and Web3 ecosystem. We hope to leverage the entrepreneurial experiences and technological insights of each generation of entrepreneurs to help the next generation through the DAO model, promoting the realization of the Web3.0 vision.