For the past 10 years, blockchain technology gave birth to a sort of Cambrian explosion, stimulating minds around the world to create decentralized projects using this technology. Since the inception of Ethereum & the expansion of smart contracts, we’ve seen many projects built around a token, whether it’s a classic ERC-20 token or a NFT, and these projects came with their own token economics, often shortened to “tokenomics”. Tokenomics are economical systems which usually explain how the value is created, distributed and shared within a blockchain project. The expansion of these projects to spheres living beyond the realm of finance such as gaming, fashion or art, gave birth to our topic of the day: The recently over-popular “~ to earn” denomination and underlying economic model. We’ll try to see what is wrong with this terminology, and why it’s often overlooking a fundamental point in any sustainable economic system: value creation.
The blockchain industry has developed itself around finance-based narratives. Bitcoin’s whitepaper title as published in 2009 is literally “Bitcoin: A Peer-to-Peer Electronic Cash System“. It set the tone for the rest of the industry. Ethereum then launched in 2015 with the intention of becoming a “Decentralized Application Platform”. The finance narrative was out of the way, but not the use cases: most projects created on Ethereum and who did find product/market fit were, for a long time, tokenized projects revolving around financial use cases (payment solutions, wallets, trading platforms…). These tokenized projects, often using their own ERC-20 tokens, had incentive mechanism in place. From 2016 to 2019, governance through token ownership was not something that gathered much spotlight, and was not a strong enough incentive in itself, when it was actually implemented (rarely), to rally users around your token. Projects created between 2016 and 2019 had to be smart & creative with their tokenomics and offer actual financial value to their holders. It was difficult though, and not many projects managed to go beyond a mere mimicking of a classic market stock:
If project performs well => token price goes up
If project performs poorly => token price goes down
It’s still a market dynamic that is dominant when it comes to evaluating the price of a project’s token, but since the boom of DeFi in 2020, we’ve seen new projects coming up with creative tokenomics, broadening the horizon for what can be done in the space.
the 2020 so called “DeFi summer” was marked by 2 projects. 2 projects that have set the blueprint for what would be the main tokenomics used in the DeFi space for a long time: Coumpound & Sushiswap. Coumpound started the trend by offering their own governance token, the $COMP token, to participants of their protocols. The goal was to provide an extra incentive on top of the interests that a traditional money market like compound has to offer, and to make sure the governance of the platform, organized through the $COMP token, would be in the hands of the platform’s users (there was a daily allocation of $COMP tokens, distributed evenly between lenders & borrowers on compound). One could ask, what’s the philosophy behind this incentive? Why would Compound decides to implement such mechanics? The answer lies in this simple sentence: “reward value creation”.
Compound is a money market protocol which caters to 2 categories of users: lenders, and borrowers. It needs both to thrive: If there are only lenders, then these lenders are just wasting their time as they’re making their personal assets available for borrowing, but nobody’s borrowing them, so they’re not earning any interest and their assets productive value is 0. On the other end, if Compound has zero lender but only people willing to borrow money, it cannot survive as borrowers will go somewhere else to find money to borrow. Compound needs both, and that’s the reason why the $COMP token allocation is split evenly between the 2 categories of users: they both create value for the protocol by either lending liquidities, or borrowing liquidities, making the protocol’s mission a success. This type of incentive mechanics is how the term “liquidity mining” was coined.
The term “mining” comes from the bitcoin ecosystem, where computers participating in the bitcoin network “mine” bitcoins by validating transactions through a “proof of work” mechanism. The success of this proof of work mechanism results in the act of “mining” bitcoin (=discover or create available bitcoin). The association of “liquidity” and “mining” comes from the idea that you are mining tokens (in this case governance tokens) through the mechanism of (providing) liquidity (think of it as “proof of providing liquidity” Vs “proof of work” for Bitcoin). As explained above, liquidity is essential on both end of the spectrum for Compound, that’s where their value lies as a money market, so if you provide liquidity for the money market that is Compound, you’re creating value for them, and so they’re rewarding you with $COMP tokens. This is liquidity mining.
Sushiswap, on the other hand, realized something similar but slightly different. This time for AMM (Automated Market Maker) based DEX (Decentralized Exchange). Uniswap kickstarted a new era for DEXs by bringing the concept of AMM into the decentralized exchange space. I won’t dive into the explanation about how an AMM works, this would require a dedicated post. In a nutshell though, a DEX like Uniswap functions thanks to liquidity pools. Users deposit liquidity (tokens), and the price of each token is adjusted in real time thanks to a complex algorithm which acts as a de-facto market maker looking at the buy & sell orders, hence the term automated market maker. The key information here is that the tokens in the pools are provided by regular users like you and me. The thing is, parking one’s tokens into a liquidity pool and making them available for trading against another token is not risk free. You can be subject to impermanent loss, or you can just miss other opportunities, such as lending your tokens to someone against an interest rate. So in order to offset this risk & opportunity cost, Sushiswap decided to not only give a cut of the trading fees generated by the protocol to participating liquidity providers, but also to give them $SUSHI governance tokens, adding an extra incentive in the mix. This is because, in their eyes, they were rewarding participating liquidity providers for providing “value” to the project by making their liquidity available.
To sum things up, in both aforementioned examples, we can see that the main activity (provide liquidity) results in a reward, because this main activity has a direct correlation to how the financial value is created on that platform. It makes sense to incentivize users to adopt this specific expected behavior, because it contributes directly to create more value for the platform.
After Liquidity Mining dominated the DeFi boom of 2020, NFTs started to dominate the narratives as we entered 2021, and it opened the doors to projects focused on lifestyle (token gated social clubs) & the creative industry (music, art, gaming). The “Play To Earn” trend kickstarted the whole “~to earn” naming trend in the web3 space, oftentimes leading to poorly thought through mechanics. It’s not difficult to retrace the origin of the term “Play To Earn”. The gaming sector is full of catchy acronyms which refer to game modes, business models, or game genres (f2p, fps, pvp, pve, rpg, png, etc.). Some catchy concepts that have emerged with mobile gaming are “Free To Play” and “Pay To Win”. Free To Play is very straightforward: the game is indeed free for anyone to play, you don’t need to pay an upfront fee. Pay To Win was a direct response to the Free To Play concept: mobile games mostly became free to play indeed, but in order to succeed in these games (whatever the metric is for success), you’d need to buy in-game items and in-game power ups, making it pretty clear that you’d need to “Pay To Win”. To me, “Play To Earn” was a clumsy attempt at coining a term that would describe what’s at stake here, by staying in the realm of “Pay to…” or “Play to…”, already familiar with gamers.
However, it didn’t sit well with gamers for obvious reasons: playing game is not something you do because you want to earn money, it’s something you do primarily because you want to have fun. Play To Earn leaves the door open for a situation where the game doesn’t need to be fun and entertaining as long as there’s something to earn (something that was reproached to a game like Axie Infinity for example). That’s why some projects have started to rebrand to “Play And Earn”, a slight change, but very important to convey with precision what’s at stake with NFTs & gaming. The idea with changing “To” to “And” is to bring the idea that the earning potential is merely a by-product of playing & having fun, not the end goal or the original impulse. It’s also enabling players to do legally something that they’ve done for years. Games like “World Of Warcraft” have had online parallel market places where people would trade in-game items for actual fiat money. With the concept of “Play And Earn”, spending time farming for rare items in a game doesn’t have to go to waste when you decide to stop playing the game. This time spent can be commoditized and materialized through the NFT of the rare item you earned in-game, and you can then sell it to a new player not willing to spend the time but ready to spend the money for it.
Once again, we can identify where the value creation takes place in this pattern. The value is represented in the in-game item that exists as an NFT. This item brings potential advantages to players owning it: ease to defeat one’s opponent, in-game status, in-game shortcuts, etc. Possibilities are endless. Having this item creates value for the player who owns it, and this value is only as high as the game is good and feels compelling for players. This value would find a fiat money equivalent on parallel markets in the past, but in the future these items will be sold as NFTs by players on official resale market places, with the blessing of the game developers. In this regard, “Play And Earn” feels like a valid tokenomics concept, because of the pre-existing economy revolving around gaming in general. “Play And Earn” is just an economic model where users will be able to share in the value created in this economy, and stop being net spenders.
Eat to Earn, Sleep To Earn, Walk To Earn or even Sex To Earn. Are you seeing a pattern here? (That’s a rhetorical question). Some projects are trying to make you think that you could make a living, or even better, become rich, just by performing perfectly basic activities that have no economic value or whatsoever: eating, sleeping, walking or having sex (debatable for the latest if we factor in prostitution, but that’s another discussion). Making someone believe that these activities create value is for me highly misleading. These activities can only generate value when we take into account the private users data attached to them. For example in the case of “Eat To Earn”, what might be valuable for a third party company is to know what you eat, how much you’re ready to pay for it, when do you eat it etc. Same goes for sleeping: a bed company might be interest in data related to your sleeping patterns, but besides that, there’s no value generated when you sleep. All these concepts have usually 2 things in common:
-They don’t create value.
-The only way to monetize them is by selling your private data.
I mean, sure, in terms of economics this works. It’s called web2. Except the Facebook, Twitter and Google of this world decided to keep the whole pie for themselves. But when you look at how these companies operate at a fundamental level, that’s were they extract value from: users data. If tomorrow Google decided to create a token and distribute it every time you perform a search on google, they’d invent the concept of “search to earn”, but at the end of the day, the value backing this token would still come from reselling your data (by the way this is close to what Brave did with their BAT token). There are even projects that are not even trying to resell their users data to generate this value, and who just expect new entrants to be willing to pay a higher price for the distributed token, because, why not? I know Ponzi scheme is a concept that is being used way too often, and in most cases wrongly, to characterize the crypto space in general but for these “~to earn” projects not even monetizing their users data, I don’t see how they could not be Ponzi schemes.
Some projects like Stepn are trying to bring gamification elements because as mentioned before, gaming has a proven track record of being able to create a very valuable economic activity around it. I can see how that’s an attractive idea, but the games that succeed do so because they are compelling, because they are good, and because many people want to play them for a very long time. Stepn is still too young to judge whether or not they’ll make it in the long run, but in this case, the focus on gameplay mechanics will be absolutely crucial to their survival. For now they’re still branding themselves as a lifestyle app, but if I were them I would embrace the gamification of the platform to the fullest and push the “game” narrative to the max, because that’s where the value will come from. We know that lifestyle & social apps struggle to monetize outside of selling user data & running ads. Stepn had better realize that and focus on what’s truly important for their platform’s value creation pipeline.
The reason why I’m not bullish on these gamified platform is that in most cases, the origin point of these projects is not to create a fun game, as it should be for any game, but to create an economy around basic activities like walking, eating etc, using gamification as a way to achieve that. That’s the reason why gamers oftentimes refuse to consider these apps as “true” games, because they know what’s going on here. A project like Foursquare in the past is a project which tried to build a sustainable economy around basic recurring activities such as, going to your favorite cafe or favorite restaurant, by adding gamification features like unlocking badges, getting specific status etc. Foursquare’s first version failed for different reasons, but one of them was certainly because their gamification features were not compelling enough, and users were not getting enough IRL value from their usage that could offset the lack of entertainment they’d encounter after using the app for a while (something that Axie Infinity managed to do well for a while as the hype around it drove the value of their tokens very high, which generated enough financial value for their users to turn a blind eye on the fact that the game was mildly fun). Without value creation at its core, a project cannot sustain its value longterm and can only hope to pump on hype. Web3 projects embracing the “~to earn” trend better realize that sooner than later.
The phase we’re in, inventing concepts which end with “~to earn” reminds me of 2017 when anything was “~coin” (Believe someone who helped creating a “coin” project back in 2017). Same energy here. It proceeds from the same misconception: the idea that adding blockchain to something will magically create a sustainable economy where users will be able to get a share of the value created. The problem is, in order to distribute value, you need to create it first. Many projects are either not factoring this in, or are hiding the fact that their shared value will come from reselling users data behind concepts sounding like harmless gamified economics. I think these projects actually harm the web3 space because from the outside, for people who are looking at it with an amateur eye, sleep to earn, sex to earn or eat to earn just sound like a perfect fit for their narrative of “crypto as a whole is a Ponzi scheme”. There’s a ray of hope I believe with creative projects though. All the DAOs being created right now which gather artists are communities that have potential for sustainable value creation and distribution. They can become the purest form of “Create To Earn”, because humans have valued artistic creation for centuries and there is already an economy in place around it. At everwave we’ve decided to embrace this path and develop the concept of “Creativity Mining”, that we might as well have called “Create To Earn”, but I just didn’t like the sound of it.
As people keep creating projects in the web3 space, I hope they’ll keep these fundamentals in mind: The only way to distribute value is to create it first. At the end of the day, the only 2 sustainable paths I can think of for the “~to earn” trend are either “sell your private data to earn” or “create value to earn”. Choose yours wisely.
