Market Analysis & Ponzinomics

Reading Time: 9 minutes

Hi Everyone. Welcome back to Naavik Digest. We hope those of you who celebrated the 4th of July in the US had a great time! If you missed the last edition, we covered Miniclip’s acquisition of SYBO, shared a great teardown of Gods Unchained, and showcased a Naavik Pro deconstruction of Worldscapes. Make sure to check those out.

Today, we’re excited to announce a new podcast segment that interviews leaders across the industry, and next week we’re dropping a new essay in our collaboration with Forte. Stay tuned for that.

Lastly, we’re gearing up to publish more F2P essays! If you are a company and would like to sponsor or partner on these upcoming awesome essays or simply learn more, please respond to this email or contact us and we’ll be in touch!

Now, let’s dive in…

This Week on The Metacast by Naavik

Eric Kress: Dissecting the Video Game Market. In this episode, Eric Kress, principal of Gossamer Consulting Group and co-host of the Deconstructor of Fun podcast, joins Naavik co-founder Aaron Bush to discuss what’s driving negative games industry growth rates, where’s there’s underlying strength, and how this recession may play out differently for games companies. Eric also shares his analysis on companies including Microsoft, Embracer, Take-Two Interactive, Electronic Arts, Roblox, and more. YouTube | Spotify | Apple Podcast | Google Podcast.

Web3 Game Fundraising in a Crypto Winter - Crypto Corner. BITKRAFT Crypto Team members Carlos Pereira and Jamie Wallace join your host (and their colleague) Nico Vereecke to discuss the current state of Web3 fundraising. Now that expectations have come back to earth, what’s the best way forward for studio founders? What do you do when the price of your token is low? How should you approach fundraising today? What lessons are to be learned from the previous bull cycle? YouTube | Spotify | Apple Podcast | Google Podcast.

Cutting Through the Game Recession Fluff - Roundtable. In this packed episode, Brett Nowak, Anil Das-Gupta and Matt Dion, join your host Maria Gillies to discuss Solana’s web3 mobile phone, Miniclip’s acquisition of Sybo, whether games are recession proof, and how Fortnite is testing play style tags. YouTube | Spotify | Apple Podcast | Google Podcast.

#1: Stepn: Rise, Fall, and Future

This is the introduction to a full game deconstruction of Stepn, written by Karan Gaikwad. Check out Naavik Pro to read the full write-up and access our entire research library.

The pandemic has certainly added a few pounds onto my already heavy frame. I would assume that quite a few consumers of this report were at home looking at opportunities for a side gig, and some of us, including me, ended up exploring crypto as a result. Well, the world has opened up now, but so has my need to get in shape along with my fascination for the world of blockchain gaming. Stepn is a unique product that aims to help users lose those pounds, but it also comes with the potential for earning. Let’s be clear upfront — Stepn is not a game in the traditional sense. As described by the team, Stepn is a Web3 lifestyle app with inbuilt Game-Fi and Social-Fi elements. It is currently available on the Solana and BSC chains.

At the center of the Stepn universe lies the Sneaker, which players need to buy from the marketplace to get started (and renting is scheduled to launch by the end of 2022). Runners can earn on-chain currency (GST/GMT) by equipping their favorite shoes on their Stepn apps and running.

Founded by Jerry Huang and Yawn Rong in mid-2021, Stepn’s first claim to fame was ranking 4th in Solana Ignition Global Hackathon’s gaming track. The team released the very successful public beta in December 2021 and were able to raise $5M in a seed funding round from Sequoia, Folius Ventures, and Solana Ventures among others.

*Rank by Transaction Volume and Users (Source:* *Degame*)

According to Degame, Stepn ranks #1 among similar projects, with a transaction volume of $35.3B for the month of May 2022 while it ranks #4 in terms of wallets, with 632K MAW (Monthly Active Wallets.) Compared to other on-chain games, the number of bots would likely be significantly less (though not zero) as it’s a so called “move-to-earn” project. There is a valid comparison to be made between Axie Infinity and Stepn since both follow very similar models; as one would expect (and as we’ll dig into much more later) both ponzinomic-driven models are falling apart, but in May Stepn outperformed Axie by approximately 3X in terms of transaction volume and wallet count. According to Forbes, Stepn generated profits of $26M in Q1 of 2022 alone and achieved a valuation of $1B. Of course, the valuation numbers don’t hold anymore, and the so-called crypto winter has hit Stepn as much as all other projects.

*GST and GMT Price and Mcap (Source: Coinmarketcap)*

Just like Axie Infinity, Stepn also has two currencies. GST is the SLP equivalent (primary in-game currency), with infinite supply, while GMT is the AXS equivalent (governance token), with a finite supply of 6B (10% of which has been released till now). The interesting (and frustrating) part of Stepn is that it is available on both Solana and BSC chains, and hence the price calculations need to be done on both chains. This trend looks eerily similar to that of Axie Infinity and is already on its way to the bottom.

It is very clear that the economic models are formulaically ponzinomic — where the inflow of new players is required to fund the ROI of older players, and the system crashes when the speed of new players joining the system decelerates. The market cap of GST has come down from $140M (21 May 2022) to $24M (30 June 2022) while that of GMT has come down from $2.3B (19th April 2022) to $480M (30 June 2022). But that doesn’t tell the full story since new tokens are frequently issued; the price of GST has plunged 95%+ to $0.13, GMT isn’t doing much better, and the floor price of Sneakers (the core NFT) has plummeted too.

Since Stepn is available on both iOS and Android, it’s worth comparing the project’s performance against the top running apps on the store. Even though it launched only this February, by May Stepn was able to amass 24.5% of the downloads of its category (based on the key apps selected above) on the store. This has not been achieved by taking away consumer activity from others but by (supposedly) increasing the market size from 4M downloads in Jan to 7.5M in May. Stepn’s market share in May based on monthly active users (MAUs) — 10% — has been understandably less, since the competitor apps have been in the market for a while.

Obviously there’s a huge caveat to address: Even though Stepn might technically compete in the same gamified running category, it’s attracting radically different users with completely different incentives. In short, it’s obvious that the promise of earning money has been the primary pull. It doesn’t take rocket science to come to that conclusion, but just take a look at where Stepn’s users come from compared to the broader category:

StepN (Source: Sensor Tower) Market (Source: Sensor Tower)

The top three countries in terms of MAU are arguably some of the most economically stressed countries at this point in time (Russia, Ukraine, and Turkey) while the MAUs for the broader category come from some of the top developed nations (US, France, and Great Britain). With the average monthly income in Ukraine being around $500, the promise of runners turning ROI-positive in under 2 weeks (when Stepn was gaining popularity) seemed like a brilliant value proposition.

Of course, if something sounds too good to be true, it almost definitely is; Stepn is no exception. What happens when the music stops and the magical internet money no longer has the value that it initially did?

*Source: Sensor Tower and CoinmarketCap*

We already see clear signs of Stepn’s implosion, with the number of downloads declining in alarmingly perfect sync with the GST price drop. All of this context helps us frame up the key questions this essay will explore, all of which look beyond the simple ponzinomics and dig into what’s next and what others can learn from specific tactics at play:

How exactly did Stepn’s economic model, which led to rapid gains, suddenly reverse and lead to its downfall? What design decisions did the team make to help mitigate a collapse, and why did those tactics work / fail?
Is the ponzinomic model reversible, and is there a possibility of redemption on the horizon? Essentially, can Stepn create value beyond financial incentives and convert its userbase from net extractors to net spenders?
Throughout all of these economic tactics, lessons learned, and plans for the future - what can other teams take into account for their own blockchain gaming projects?

Let’s dive in…

Content Worth Consuming

Will Harbin on Lessons from Kixeye and Making a Comeback (GameMakers): “Will Harbin was CEO at Kixeye during the early 2010s when the company launched some of the most innovative games to the market at that time: Desktop Tower Defense, Backyard Monsters, War Commander, and Battle Pirates. The company was poised to become the next big gaming juggernaut but did not quite make the transition to mobile. Today Will is making a comeback with Kixeye 2.0, his new company Global Worldwide which recently launched Kingdom Maker.” Link
Tomb Raider and Transmedia: What next for Embracer Group? (GameIndustry.biz): “The ever-expanding empire's CEO Lars Wingefors discusses the ongoing M&A strategy and taking Embracer beyond games.” Link
Blake Robbins: How Crypto Will Change Gaming and the Creator Economy (Delphi Digital): “Blake Robbins is the Principal at Benchmark, an early stage VC firm focused on social, mobile, local, and cloud companies. We dive into all things crypto gaming, how crypto will change the creator economy, finding medium-native use cases, and much more.” Link
Scopely scopes out new partnerships, platforms and web3 as new game launches (MobileGamer.biz): “Scopely’s had a busy twelve months. Since July 2021 it has acquired or invested in Burlingame, GSN Games, The Games Fund, Omnidrone, Pixel Toys and Tag Games, and last week it launched Kingdom Maker, a new 4X strategy game from another new partner, Global Worldwide. After Star Trek Fleet Command and Marvel Strike Force, Kingdom Maker makes it three strategy titles in the Scopely portfolio; the company’s games president Steve Huff tells us that 80% of Fleet Command players are playing seven days a week, and Marvel Strike Force players spend about two hours in the game per day.” Link
Ads in Moile Games (Elite Game Developers): “This recording is from a panel I did last week with Jan Pollack from Wooga, Ross Brockman from Google, and Christian Facey from Audiomob, where we talked about ads in mobile games and how things have been changing in the recent years. Topics that we cover include the privacy changes on mobile, what kind of future trends the panelists are seeing get materialized, and how game developers should optimally approach ad monetization.” Link