Is STEPN Actually Web3?
- Mike Lingle at Rocket Pro Forma
- Sep 19, 2022
- 11 min read
Updated: Sep 22, 2022
Philosophical question:
Is STEPN actually #Web3 if they made $122M in profit while user rewards went to zero?
Here's what STEPN says on their website: "All assets in the STEPN app are owned by individual users and [the] majority of [the] earnings in app are made by users."
But is that what actually happens? Let's take a look...
Short story: I use STEPN all the time and I think they do an amazing job nudging me to walk every day.
However, I think they have two massive problems. First, STEPN's proprietary tokens (GST and GMT) put them in direct competition with their customers—which is the opposite of the Web3 ethos.
Second, they've failed to build a sustainable economy, in the same way that all P2E games have failed at this so far (I'm looking at you, Axie Infinity).
The three pillars of a sustainable economy are 1) New money always coming in from outside, 2) Contributors create real value through their work, and 3) Contributors participate meaningfully in the monetization.
In this article I lay out a framework for building a sustainable economy. Hint: it's not about forcing users to spend all of their rewards points inside the app. A healthy Web3 ecosystem should be able to share revenue with its contributors. Even YouTube—arguably Web2—shares more than 50% of revenue with creators.
STEPN's proprietary tokens (GST and GMT) put them in direct competition with their customers—which is the opposite of the Web3 ethos.
And if you're launching your own NFT project, check out my NFT budgeting tool for your calculating income from your mint, revenue from secondary trading, how rarities affect income, staffing, expenses, and tokenomics.
1. First of all, what is STEPN?
STEPN is an app where users equipped with NFT sneakers walk, jog, or run outdoors to earn rewards in the form of two (!) different proprietary cryptocurrencies. These tokens can then be used to level up and mint new sneakers—and may also be converted to crypto or cash.
You can read the STEPN litepaper for more info (go ahead...I'll wait).
Or maybe you want to watch their promo video instead?
The key thing is that to get started with STEPN you have to purchase a sneaker NFT. When the app first launched the most affordable sneakers were $1,000+ (!) Since then the prices have dropped to about $50 for an entry-level sneaker NFT.
The NFT sneakers are completely virtual, so they only exist in the app. Welcome to the future ;)
2. How successful is STEPN?
STEPN launched their beta in December of 2021. Seven months later they announced $122 million USD in *profit* for Q2. Along the way in March 2022 (four months after launch) their NFT marketplace reached an all-time high of 264,000 sneakers in *daily* transactions.
STEPN launched two tokens: the GST utility token for earned rewards and the GMT governance token (which can also be earned once you level-up your sneaker NFT to 30). In July 2022 they launched their own in-app DEX (decentralized token exchange) because their two tokens represented 75% of the volume on Orca (one of Solana's largest DEXes).
Messari reports that STEPN accounted for 20% of Solana’s total users at its peak in May.
From a personal standpoint, STEPN has been successful in getting me to walk for 30 minutes every day. I definitely enjoyed it more when I was earning $40 per walk (!) instead of $2 per walk—but I've embraced the behavior change even after the crash in STEPN's token and NFT prices (we'll talk about that in a minute).
3. How easy is STEPN to use?
STEPN is incredibly *difficult* to set up! Remember that you can't use the app until you purchase an NFT, which requires you to transfer in crypto from your MetaMask or Solana wallet. Here's the workflow:
Download the STEPN app and create an account.
Go to the STEPN's in-app marketplace, choose a blockchain (Ethereum, Solana, or Binance) and pick a sneaker you want to buy—even though you have no idea which attributes are important and the prices range from $50 to $20,000. Make a note of the cost of the sneaker NFT you choose.
Connect your existing crypto wallet to the app and transfer in enough tokens to purchase the sneaker + extra to pay for gas for all of the in-app transactions you'll need to do in the future.
Wait a really long time for your transfer to go through, even on a fast blockchain like Solana. This is *scary* if you've chosen an expensive sneaker and you don't know where your money is or when it will show up inside the app.
STEPN requires two separate in-app wallets—so now you have to transfer your crypto to the other (in-game) wallet.
Again wait a really long time for your transfer to go through. Again, it's scary when your money just disappears for a while. Also, you have to pay a gas fee to transfer the funds between the two wallets inside the app.
Go back to STEPN's in-app marketplace, see if the sneaker you want is still available (remember they were selling 264,000 NFTs per day at one point, so chances were good your sneaker would have sold already), and purchase it.
Exit the marketplace and go to STEPN's main screen to start your first walk.
See that you need to wait 24 hours for your energy to refresh before you can take your first walk.
Close the app and wait. Maybe you'll remember to open it 24 hours later?
Wow that was exhausting!
STEPN is incredibly difficult to set up. It's only for crypto and NFT experts.
I asked one of my super-nerdy-gamer-crypto-developer friends to check it out and he came back and said he couldn't figure out how to get started.
There's no way average people—like my wife, or my parents—could figure it out. Getting started in STEPN is only for people who have been knee-deep in crypto + NFTs for a while.
Once you're in the game, however, it's easy. You just press the Start button once per day and either walk or run, depending on your shoe (you did pick the right type of shoe for your movement speed, right?)
4. Does STEPN put customers first?
STEPN has the single worst tech support I've encountered in 2022. Especially when you consider that many of their customers have spent hundreds of dollars buying sneaker NFTs.
My experience was that after a few months my NFTs started disappearing every time I opened the app.
I submitted a bug report on June 7 through the app but received no response.
My only other option was to post the bug on the "newbie" channel in Discord. This was kind of a free-for-all at the time, although it's slowed down considerably since the crash (more on that below). I did receive responses from the chat moderator, but they were unwilling to do any kind of deep dive on my problem. I ended up getting better advice from other users on the chat.
Two weeks later on June 21, I finally received an email reply that said
"Let me help out...we will be CLOSING all currently open support tickets...we encourage everyone who are still currently experiencing issues to please resubmit their concerns using the new process."
That's not helping out.
I'm writing this 3 months later and STEPN still hasn't fixed my issue. Most times when I launch the app my NFTs are missing and I have to quit and re-launch a few times while turning my iPhone's WiFi on and off to get my NFTs to show up.
This is only the tip of the iceberg about how STEPN treats its customers. Remember the part about the "majority of earnings in app are made by users?"
5. Is STEPN actually Web3?
My understanding of Web3 is that users participate meaningfully in the monetization: We're all owners! Finally!
Well...not so fast. Here's how STEPN's two tokens have performed since launch (I've lined up the months in the two charts, since GMT launched a few months after GST):
Notice how they earned $122M in profit at the same time the value of their tokens was crashing? STEPN took all of the value for themselves!
My experience as a loyal STEPN user was that:
The rewards I earn each day crashed from $40 to $2
The value of the NFTs I had bought dropped by 95%
Messari reports that daily active users have dropped by 80% and new users have decreased from 20% to 5% of STEPN’s total user base.
Ouch.
Honestly STEPN feels like Facebook all over again—where they're monetizing me—except that in STEPN's version of Web3 they ask their users to pay hundreds of dollars to buy in first.
Double ouch.
Honestly STEPN feels like Facebook all over again—where they're monetizing me—except that in STEPN's version of Web3 they ask their users to pay hundreds of dollars to buy in first.
The STEPN users who made money are the ones who either a) got in early before the in-game economy collapsed, or b) made money selling high-value NFTs.
It's hard to tell how much the volume of NFT sales was, but if we assume that at least 70% of the $122M is from 7% royalties on NFT sales...that gives us $1.22B (billion with a "B") in NFT sales in Q2. Some users made money—although many, including myself, lost money on their NFTs. We're back to the ponzi construct.
6. What about those tokens?
I've been thinking about this a lot: Does it make sense for an app to launch its own cryptocurrency (or two)?
The dream is that this provides "free" money to pay out rewards to users. Because rewards are expensive! They reduce your gross margin, and they sit on your startup's balance sheet as a debt obligation until your customers either use them or they expire (which is why rewards often expire).
Another benefit is that you can give investors tokens instead of equity (The Block reports that STEPN raised $5M using a SAFT: Simple Agreement for Future Tokens). This is great for your cap table since you're exchanging actual investor dollars for crypto tokens you minted out of thin air.
However, there are a few major problems with apps launching their own tokens:
Pretty much all tokens crash
Proprietary tokens force users to become currency traders
A proprietary token puts an app in direct competition with its users!
The first problem is that pretty much all proprietary tokens crash. This punishes your users—plus it hurts the reputation of your project. Everyone starts calling your app a ponzi scheme...because it usually is.
Let's agree that a ponzi is a system that always requires more money to come in to keep it afloat. This is definitely one part of a healthy ecosystem, but it will always fail eventually if that's as far as it goes.
Hal Press, the founder of crypto hedge fund North Rock Digital, says:
Crypto broadly is net-income negative and needs to fund this negative net income via token sales which creates net structural outflows. Crypto needs active buyers every day to keep prices from going down.
Press goes on to point out that, "The S&P, on the other hand, is net income positive, meaning its expenses are lower than its revenue. As a result, the S&P has buybacks every single day and has structural inflows every single day.
I have some thoughts on how to build a sustainable economy that I'll share in a minute.
Axie Infinity is another famous blockchain game that launched their own token. Does this chart look familiar?
The second problem is that proprietary tokens force users to become currency traders. I'm constantly trying to predict when both GST and GMT will crash or pump. The value of my rewards changes constantly, so there's no ability to bank my gains. It's exhausting and frustrating. It's a very different experience that airline miles, which basically hold their value over time.
Proprietary tokens force users to become currency traders, which is exhausting and often expensive.
It turns out that I'm not a great currency trader. I've lost a bunch of value trying to preserve the value of my STEPN rewards.
And in my opinion the biggest problem is that a proprietary token appears to put the app in direct competition with its users—which again is the opposite of my understanding of Web3.
STEPN's main focus has become to keep as many tokens inside the game as possible, so they've implemented all kinds of extra costs. They simply don't want users to cash out their rewards for fiat.
For example, you've always had to pay to repair your shoes after each walk. They recently rolled out an additional pay-to-repair requirement called HP. So now you have to repair your shoe NFTs twice.
And fundamentally, the app punishes users for not walking every 24 hours. If your energy recharges fully and you're late walking, then you permanently miss out on those potential rewards.
They've added a seemingly useless subscription for $19.99 per month. Do these 3 items seem valuable to you?
My favorite is the chance to permanently improve your chance of upgrading gems. Level 1 gems, for example, have a 65% chance of self-destructing when you try to upgrade them.
STEPN wants me to pay $1352 to turn my 65% chance of losing my gem during an upgrade into a 64% chance?
At the time of this writing, 2000 GMT tokens are worth $1352 USD.
So let's review: STEPN wants me to pay $1352 to turn my 65% chance of losing my gem during an upgrade into a 64% chance?
7. The good, the bad, and the ugly
I'm an avid STEPN user, and I've walked pretty much every day since I first installed the app last April. I've covered over 200km in 162 walks. And I've used pretty much every feature: I've bought and minted NFTs, leveled up multiple sneakers, earned and opened a ton of mystery chests, upgraded gems, supercharged abilities, and more.
What I love about STEPN:
They successfully got me to permanently change my behavior. I now carve out 30 minutes each day to walk.
The gamification is world-class. I love earning points and using them inside the app to improve my NFTs.
They've made infinite NFTs work—vs. typical projects that limit the number of NFTs to 10,000. Some people argue this is deflationary, but I think you need infinite NFTs if you truly want to onboard all of the world's walkers.
What I dislike about STEPN:
Their customer service is inexcusably bad, especially for a company that's earned so much money.
Their tokens are a mess. Maybe they could have managed a single token, but it's too expensive and complicated for them to properly support more than one.
They seem to be more focused on extracting value from their users (extra fees, expensive and useless subscription, crashing token and NFT prices) than they are on treating their customers like true Web3 collaborators.
And most importantly, STEPN has failed to build a sustainable economy. The fatal flaw is that it's completely reliant on new money always coming in from the outside—ponzi—which stopped happening after the crash.
8. The three pillars of a sustainable economy:
A functioning economy is a flywheel with more than just new people buying in:
New money always coming in from outside (this is what STEPN and Axie Infinity focused on, but they never solved #2 and #3 below)
Contributors create real value through their work (STEPN fails here because no one but me cares if I walk or not today, and my walking data isn't valuable)
Contributors participate meaningfully in the monetization (STEPN earned $122M in profit while user rewards and NFT values crashed 95%)
The three pillars of a sustainable economy are 1) New money always coming in from outside, 2) Contributors create real value through their work, and 3) Contributors participate meaningfully in the monetization.
What's a successful example of this, other than the US economy?
Ethereum has created a sustainable economy. They pioneered programmable money, and builders create massive value: NFTs, DeFi, digitizing bonds, and more—not to mention the billions of dollars in fees the miners have received each year in base fees and priority fees (tbd how much of that will be delivered to proof-of-stakers now that The Merge is complete).
Here's the Ethereum Q3 2022 income statement courtesy of Messari:
Ethereum is a sustainable economy because:
It always has new money coming in from the outside
Ethereum contributors create real value through their work (yes, someone always thinks those monkey pictures are valuable even if you don't), and
Contributors participate meaningfully in the monetization of their contributions
Is it possible for a Web3 game to accomplish these three things?
I think the answer is yes, and I'll be writing more about that soon.
Are you launching your own NFT project? You need a budgeting tool to help you calculated expenses, staffing, tokenomics, and income from minting and secondary trading. Check out my NFT financial projections tool.
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Mike Lingle is the founder of Rocket Pro Forma (financial projections for startups), acting CFO at Security Token Group (digital asset securities on the blockchain), and an entrepreneur-in-residence at Founder Institute. He co-founded SlideRocket, an online slide presentation app that was acquired by VMWare in 2011.
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