Exploring Two X-to-Earn Models: From Marketplaces to Positive Externality Aggregators

Image source: Art Labs

The “X-to-Earn” (“X2E”) concept has captured significant attention since 2021. However, many X2E projects are now facing the challenge of declining user engagement as the initial surge of enthusiasm subsides. In this essay, I aim to categorize X2E projects into two distinct types, elucidating their differences and exploring the business model pertinent to each. Subsequently, I will present my thesis for a novel revenue model that aims to make certain X2E projects sustainable while also promoting prosocial activities.

Two Categories of X-to-Earn Projects

Based on their sustainability, X2E projects can be broadly divided into two groups: those that are not self-sustaining and those that are self-sustaining without external funding. Projects in the former category carry a high risk of devolving into a Ponzi scheme, while those in the latter category have a significantly lower risk.

STEPN is an example of the former category. It is a move-to-earn project that incentivizes people to walk or run. It is designed to make most participants earn, but these earnings must originate from somewhere. In 2023, a STEPN user, on average, earned $0.06 per day, a decrease from the peak of $42.55 in 2022 (source: CoinGecko). My detailed analysis revealed that the initial cost for a new user to enter the game is around US$40 (required to purchase one sneaker in the game; conversion rate at the time of this essay), meaning it takes nearly two years for a user to recoup the initial cost. Furthermore, new users account for ~15% of all current active users (source: Dune). This indicates that a significant portion of the payments to existing users comes from new users. Using proceeds from new users to pay existing users, akin to funding returns to existing investors with capital from new investors, is, by definition, a Ponzi scheme.

The way to avoid evolving into a Ponzi is to secure external, organic funding (that is not from new investors), such as through advertising. However, the amount of capital required to make the monetary value of incentives appealing is often underestimated. Let’s optimistically assume that STEPN could eventually match Meta’s earnings. Last year (2022), Meta reported US$ 114M in advertising revenue and an average revenue per active user of US$3.3 per quarter (source: Meta IR). If all of Meta’s revenue were redistributed to users, each user would receive only US$0.036 per day. This amount is scarcely attractive.

The fundamental issue with non-self-sustaining X2E projects like STEPN is their potential to devolve into Ponzi schemes in the absence of organic external income. Even if they were able to generate as much external income per active user as Meta does through advertising, the expanding user base might render the payments insufficiently attractive. I will outline my proposed solution to this issue later in this essay. Examples of such non-self-sustaining X2Es include Move-to-Earn (e.g., STEPN, Sweatcoin), Sleep-to-Earn (e.g., SleeFi, Sleep Future), Eat-to-Earn (e.g., FOOD-FI, Poppin), Learn-to-Earn (e.g., RabbitHole, LetMeSpeak), and Read-to-Earn (e.g., ReadON). The reason is that their “X” isn’t value-added activities that others are willing to directly pay for. Yes, although “learn” and “read” seem different from other activities in this category, they are not self-sustaining either.

In contrast, there are X2E projects that can sustain themselves. These are characterized by a division of users into two groups: producers and consumers, where consumers pay producers for their work. In such models, only some users earn. Examples include Create-to-Earn (e.g., Sound, Shibuya), Endorse-to-Earn (e.g., Binance Affiliate Program), Contribute-Data-to-Earn (e.g., Datum, Delphia), and Write-to-Earn (e.g., Publish0x, BULB). These “X” are activities that people are willing to pay for, making their sustainability logical.

What about Play-to-Earn (P2E)? These models blend elements of both categories, but many have learned the hard way that it’s better to be self-sustaining. Axie Infinity, one of the earliest P2E platforms, initially adopted a Ponzi-like, non-self-sustaining payment model and subsequently collapsed. Its successors shifted to a self-sustaining model, wherein some users pay while others earn, granting paying users certain in-game privileges. This shift results in an ironic resemblance of P2E games to the traditional “freemium” model, with the distinction being that earnings are in cryptos, potentially unlocking future opportunities through blockchain.

Self-sustaining X2Es as Verticalized Marketplaces

Self-sustaining X2Es function fundamentally as marketplaces, connecting producers and consumers in a manner akin to platforms like eBay or OpenSea. Their distinguishing feature from traditional online marketplaces lies in their future development trajectory. As these X2E platforms evolve, they will integrate a variety of non-commerce functions, particularly those that facilitate the creation and production processes for producers. This approach is in line with Multicoin Capital’s Verticalization of Marketplaces Thesis.

While each self-sustaining X2E project may follow a unique path to verticalization and adopt different go-to-market strategies, their success generally hinges on several key factors:

• The number of producers and consumers the platform connects, and the level of engagement within these connections
• The ease with which the platform facilitates production and transaction processes.
• The competitiveness of trading fees, and the allocation of these fees — whether they are used merely for value extraction or are reinvested into the community, such as by funding emerging producers/creators, developing features desired by the community, or expanding the community itself

These are the critical areas that founders ought to focus on and investors should evaluate when considering involvement in self-sustaining X2E projects.

Non-self-sustaining X2Es: The Positive Externality Aggregation Thesis

Above, I mentioned that non-self-sustaining X2Es are likely to end up either becoming Ponzi schemes or providing inadequate earnings through advertising revenue. This situation leads to a dead end. Over the past few days, I’ve contemplated whether there could be better use cases and a more viable business model for these projects. Inspired by liquidity aggregation, I have conceptualized what I call the Positive Externality Aggregation Thesis.

A positive externality occurs when an individual’s production or consumption in a market benefits others without directly charging them for this advantage, effectively providing a free benefit to a third party (see examples here). While some of these externalities naturally result from people’s habits, many require guidance from educational, societal, or religious influences. Sometimes, individuals may even need to make small sacrifices (e.g., self-quarantine during Covid), without receiving compensation.

The essence of my Positive Externality Aggregation Thesis is that crypto-economic protocols, potentially in the form of X2Es, can be designed to incentivize positive externalities. For the first time in human history, these externalities can be aggregated, priced, and traded, with the proceeds helping to sustain these X2Es. The aggregation and trading of positive externality isn’t possible until now with the advent of cryptos, because:

a) The crypto network is permissionless and borderless, gathering a vast number of participants in a way traditional organizations cannot.

b) Recent developments in crypto rails enable arbitrary, bi-directional payment flows, as discussed in Multicoin Capital’s article Unlocking Payments Over Crypto Rails. This allows every participant to receive their share of earnings.

c) The protocol/DAO acts as a unified entity to commercialize aggregated externalities and negotiate with potential buyers. This role of the protocol/DAO is crucial, as the bargaining power of suppliers is partly influenced by their degree of fragmentation. A unified entity, in contrast to numerous individuals, has the capability to negotiate higher revenue for the protocol.

Traditionally, without cryptos involved, there are some attempts to commercialize positive externalities, but they are far from perfect. For instance, during the Covid pandemic, Hong Kong imposed a stringent lockdown. Industries such as catering, hotels, and aviation, which were severely impacted by the lockdown, organized several lucky draws to incentivize vaccinations. In this case, the absence of “ a) permissionlessness” mentioned above means participation was restricted to local registrants; the lack of “b) bi-directional payment” rendered lucky draws the next best option, benefiting only a handful of winners; and the lack of “c) unified entity” to represent participants meant that the positive externalities of vaccinations were predominantly appropriated by the organizers, not the vaccine recipients. If there were a “vaccinate-to-earn” crypto-economic protocol, more people would be incentivized on a cross-border scale and they all would get paid. Industries will pay more but they aren’t necessarily at a loss, as they would benefit from an expedited return to normal operations. Ultimately, such a model promotes a scenario where everyone stands to gain.

This “vaccinate-to-earn” example also demonstrates that commercializing positive externalities is most effective when targeting their beneficiaries (such as the catering, hotel, and aviation industries in this example), rather than solely through advertising as Web2 free apps do. Drawing a parallel, Web2 social apps primarily gather users’ attention and market it to “attention seekers” — companies looking to advertise. Similarly, these X2E projects should focus on aggregating positive externalities and generating revenue from “externality seekers” — the beneficiaries. For instance, most current walk/run-to-earn projects generate revenue through embedded advertising, like crossover marketing with running shoe brands. However, they should broaden their scope and consider commercializing through entities like users’ employers, insurance companies, healthcare providers, etc. This approach presents an innovative solution to the previously highlighted issue of insufficient earnings in X2Es.

OFFSET by Sweetgum Labs aligns well with the Positive Externality Aggregation Thesis. OFFSET incentivizes users to walk, bike, or use EVs instead of gasoline cars. While it may sound similar to other move-to-earn projects, OFFSET distinguishes itself by tapping into the carbon credit market, which acknowledges the positive externalities of “green travel” and makes them tradable. For instance, a person who switches from driving a gasoline car for 10 miles (= 16 kilometers) daily to using an EV or cycling can save around 6.5T of carbon emissions annually. As of 2023, the price of carbon emissions in the European Union’s carbon market has reached around 100 Euros per ton ( source). Therefore, a user could theoretically earn about US$700 a year through OFFSET, a significantly more attractive proposition than STEPN’s current earning rate of $0.06 per day.

There is a concern regarding this type of X2E about the prudence of compensating individuals for activities they are already engaged in. This issue is akin to the debate over the effectiveness of issuing coupons to loyal customers. While offering discounts may reduce revenue from a loyal customer in the short term, it is well-established in business that broad distribution of coupons can enhance overall revenue. Similarly, if we think about the overall situation, when earnings are distributed to all users, including those already engaging in activity X, it is likely to attract more participants and amplify the positive impact of the crypto-economic protocol. From another angle, we can categorize users in an X2E project into three types: 1) those who are already performing X for free, 2) those who will engage in X due to crypto incentives, and 3) those who participate in X because they find the X2E platform enjoyable or are influenced by seeing others involved. Compensating Type 1 users can boost the user base for the other two types, as these users serve as role models for Type 2 users in terms of earnings and influencers for Type 3 users in terms of engagement.

Should the Positive Externality Aggregation Thesis hold true, crypto-economic protocols could enable large-scale coordination to achieve specific objectives, not only in building physical infrastructure (“ DePIN “) but also in fostering prosocial activities. This thesis also introduces a novel method to aggregate these activities and commercialize them, with the earnings further encouraging individuals to engage in these activities. My enthusiasm for such X2E projects stems from their potential to create a market for prosocial activities, which have never before been monetized, thereby benefiting everyone involved.

Bottom Line

In summary, X2E projects are of two primary types. The first is the self-sustaining variety, functioning fundamentally as marketplaces. Here, certain users earn while others pay. The marketplace will be verticalized.

The second type lacks self-sustainability, characterized by a model where all users earn. Traditional Web2-style advertising revenue models are unlikely to render this type of X2E project appealing in earnings. To address this challenge, I have proposed the Positive Externality Aggregation Thesis — X2Es that generate and aggregate positive externalities can be commercialized through those who benefit from these externalities. This innovative strategy aims to incentivize a greater number of individuals to engage in prosocial activities, ultimately making everyone better off.

For those involved in building Create-to-Earn (aka creator monetization) projects, or those contemplating or building crypto-economic protocols aligned with the Positive Externality Aggregation Thesis, I invite you to connect. Please feel free to reach out via DM to @0xHaydon. I am eager to exchange ideas and gain insights into your projects.

ABOUT THE AUTHOR

As a crypto and Web3 enthusiast, Haydon has been committed to the blockchain space through volatile cycles for 5 years. His expertise encompasses token investment, technical development, and in-depth long-form analysis.

With recent experience in both investing (as an angel investor) and operating (as a product manager for a startup), Haydon has also developed well-rounded skills for both sides of the same coin of VC. Previously, Haydon began his career at AECOM, a Fortune 200 multinational infrastructure consulting firm.

Haydon holds an MBA from the Carlson School of Management at the University of Minnesota and a BEng from the Hong Kong Polytechnic University. He speaks English, Cantonese, and Mandarin Chinese.

Connect with Haydon on his website, LinkedIn, and Twitter.

DISCLAIMER

The analysis in this document is for general information purposes only. While I endeavor to keep the information up to date and correct, I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the document or the information, products, companies, or related graphics contained in this document for any purpose. Any reliance you place on such information is therefore strictly at your own risk.

Originally published at https://www.haydonluo.com on December 20, 2023.