X-To-Earn Ponzi System

ChainWise
4 min readMay 28, 2022

X-to-earn differs from Web2’s Ponzi architecture in both economic system and organizational structure; the word Ponzi does not always mean a scam.

Tokenization, a tool unique to Web3, has spurred the rapid growth of this market. It brings a greater sense of engagement and alignment of interest to users while serving as an incentive tool, giving projects almost unlimited freedom to potentially make money from being a protocol or whatever, no wonder X-to -earn has become a hot topic in the L3 (application layer) field.

Opinion of X-to-earn

It is confirmed to conclude that most of the Gamefi are copycats of Axie Infinity. Axie caused the popularity of P2E, and the emergence of X-to-earn later.

Many people will say that Axie is a Ponzi. At first glance, it does have some Ponzi characteristics, but we need to disambiguate the word, Ponzi ≠ scam. Ponzi is just a financial construct that transfers value provided by later participants to earlier participants. Whether it is a scam or not really depends on the details within the system. In fact, by structure, pensions are the largest Ponzi in the world, but they are an integral and positive part of our social security: you pay for those before you, and those after you pay for you. Note that this is an abstraction of how real pensions work, but you probably know what I’m talking about.

Now think about all the X-to-earn projects out there. If you read their white paper, you will find a common assumption: the prosperity of the project and the token depends on more people using the product.

Now consider this: The Web3 narrative basically says, “Early backers believe in a project, participate in its growth, and everyone shares in the rewards”. I think the former assumption is logical, and the spirit of the latter is commendable. However, combine the two with supply and demand and you have a Ponzi structure.

In a nutshell, my first thought is: that Ponzi structures are a natural part of any X-to-earn system design.

Important factors

We can evaluate projects by considering their timing, team, and product-market fit. However, these standards seem antiquated and inadequate for tokenization projects.

The reason why many tokenization projects (of which X-to-earn is a part) fail can be attributed to three factors:

  1. The Speculator Effect
  2. Lack of timely control of the project
  3. Failure to provide sustainable utility

The risk of a Web2 Ponzi scheme is discontinuous, with little risk to early participants if the system crashes, and no financial incentive for early participants to reinvest in the system.

However, since X-to-earn is naturally nested in the free market and based on digital assets, the value transfer system is no longer like a traditional pyramid.

In an X-to-earn system, the value loop is no longer closed and does not move strictly upwards, transaction friction is relatively low, early participants can re-enter the game, and value easily exits the economic system. This means that speculators can only participate in the “earn” part and not participate in “X”, they can easily buy and sell, which keeps the risk spread out to everyone, which makes early participants to lose money, and later It is possible to make money. This is unimaginable in traditional Ponzi.

On the other hand, X-to-earn projects often do not have these measures, which may be the core reason why some early “Write to earn” and “Comment to earn” projects quickly fade out of this field.

However, there are some exceptions. Although Stepn, a currently popular project, does not necessarily have an algorithmic prevention system, it has been proved through special in-game events that it can indirectly adjust the supply and demand of Tokens. This is from April 27, 2022 to May 2022. It has proven its effectiveness in stabilizing GST and GMT during the 5th. Although the market as a whole has been falling since then, and GMT has also fallen, that’s another story.

Axie Infinity is one such example. The team’s strategic adjustment is correct, i.e. integration with the Ronin chain to maintain the game and has the potential to break the Ponzi shackles, but it is not enough; the price of Token is not strictly regulated, and the bear market since November 2021 encountered with security breaches, the project is now being falling apart.

Some projects affect token prices through direct capital inflow/outflow from the capital pool, while others adjust them indirectly through technical operations. The details of how to best perform controls are best studied with individual examples.

Whether it’s Web2 or Web3, entrepreneurship is no different. Entrepreneurs eager to succeed still need to build meaningful products. More than Web2, founders need vision and guts, the ability to exercise control and resist the dangers camouflaged under a glamorous bubble. Risk is more common in Web3, but just be friends of time and patience, and on the way up, one will eventually leave their mark and legacy.

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