Are all play-to-earn games Ponzi?

STEPN Official
12 min readApr 6, 2022


In the early 1920s, Charles Ponzi ran a fraudulent investment scheme, netting him almost $20 million (about $258 million in today’s value). His modus operandi consisted of offering high returns to investors when all he was doing was taking money from new investors to pay the earlier ones. Since then, similar schemes have been colloquially dubbed Ponzi Schemes (Ponzis).

A Ponzi Scheme is defined as “an investment fraud that pays existing investors with funds collected from new investors”. In such schemes, investors pay a general manager who promises them a high return. The money being paid out to these investors come from the payments of later investors. There is no legitimate income stream into the structure save for the incoming funds of those who have newly joined.

This model is unsustainable, relying only on external money coming in. When there are no new investors, the scheme collapses and leaves investors, in particular the newer ones, out of pocket. Ponzis are widely condemned as unethical and rampantly cracked down on by regulatory bodies like the SEC.

P2E games and their close association with Ponzi schemes

The 21st century has seen the advent of Play 2 Earn (“P2E”) games, characterized by the meteoric surge in popularity of games such as Axie Infinity. In 2021, Axie Infinity commanded an impressive $3.5 billion in transaction volume and an 18,000% growth in their native token $AXS. The game was especially popular in countries like the Philippines, where players could easily earn more than what local jobs were paying.

With a usually low initial barrier to entry and enormous earning potential, P2E games present a new viable way of bringing revenue to players. It presents life-changing opportunities, especially to players in low-income countries. It is arguable that they are a modern force of good. Despite all this, there is no shortage of critics condemning P2E games as Ponzi schemes. While a lot of this is undoubtedly generated by general fear caused by a lack of knowledge from the general public about crypto and the P2E sphere, there are extremely valid arguments that P2E games are indeed a house of cards liable to collapse and leave thousands financially burnt.

For the uninitiated, here is an extremely stripped-down example of a P2E game:
Let’s call it Game ABC. Starting cost to get involved in the game is to purchase an NFT for $100. Players can then earn 100 tokens per day (valued at $0.01/token). These tokens are used to take part in the game’s ecosystem, such as upgrades, level-ups, etc. Players are able to either reinvest the token into the game or cash it out for profit.

From the outset, it looks like a fairly harmless model. But where are these users getting the money from to cash out? Most games kickstart a Liquidity Pool upon launch, which usually pegs their game token to a stable coin like USDC. Players can exchange the game token for USDC, or vice versa. This will bootstrap the initial liquidity for players to get started in the game. As the game progresses, the Liquidity Pool usually becomes self-sustainable with players buying and selling, adding into the pool and growing it.

For the most basic of P2E games, the profitability of this model hinges on newer players constantly joining. However, the threat of demand dying down is very real — possibly through the oversaturation of the P2E market. The result is that the liquidity pool is not growing, but is being drained by players looking to cash out. This is usually a zero-sum game — where earlier investors take all and newer players do not get a healthy return on their investment.

Does this mean that all P2E games are inherently unethical and are categorically Ponzi schemes? We believe otherwise and will present the factors that make a P2E game unsustainable, and how games can overcome that.

Tokenomics impact the sustainability of a game

The underpinning concept here is simple; that of supply and demand. As the demand for payouts grow, so must the incoming revenue and vice versa. This is essentially token economics, or “tokenomics”. Tokenomics describes the “math and incentives governing crypto assets”, which cover the mechanics of the asset — from its use cases which acts as a driver for demand and burn mechanism to reduce supply, as well as psychological and behavioural factors that affect the value of the asset over time. Good tokenomics are critical to a project’s long-term success. Without well-designed tokenomics, the inflation of the game token will spiral and lead to a crash and burn situation.

  • Supply: An oversupply of tokens will reduce the value of each individual token.
  • Demand: A lack of demand will lead to players cashing out their tokens at any possible juncture, leading to a rapid drop in the token’s value

Before going further, we need to first understand what a liquidity pool is and why it is essential for P2E Games. A liquidity pool is essentially a “pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets”. Let’s look at an example:

  • A liquidity pool has 10 Token X and 10 USDC in it. In this case, 1 Token X = 1 USDC.
  • When users swap Token X into USDC, the price of Token X will drop, and vice versa. Example: If a user swaps in 5 Token X for USDC, the corresponding price of Token X to USDC in the pool will drop to 0.80 USDC / Token X.

In order to avoid a rapid drain of the liquidity pool and retain the game token’s value, the goal is to incentivise players to either spend (burn) or hold their tokens. The benefit here is two-fold. Firstly, it induces demand through a burning mechanism for the token — thereby reducing the available supply. Secondly, it avoids the drainage of the liquidity pool. With that in mind, it is critically important that sufficient use cases of the token and burn mechanisms are in place. What this does, is reduce the supply of the tokens, and create a demand for them. If a P2E game is lacking in dynamic management of spending mechanics, there is no reason for players to want to hold their tokens. Some examples of spending mechanics could include levelling up items, purchasing cosmetic items, and other various micro-transactions.

Red flags: Game unsustainability that signals a Ponzi

Ultimately, a game that does not seek to balance the earnings of older and newer players and only relies on income from new players is structurally similar to a Ponzi Scheme. Here are some ways in which games fail to do so.

Poorly Designed Token Economics

With reference to the above explanation on tokenomics, game developers need to structure their tokenomics in such a way that balances the supply and demand. Unsustainable games often have red flags such as the following.

  • Limited use cases for the token both:
  • Encourages players to cash out and drain the liquidity pool
  • Fail to provide a burn mechanism and reduce the supply of the token
  • Poor distribution model that favours private investors over actual users.
  • Investors have no interest in using these tokens and are much more likely to sell them (thereby affecting the liquidity pool)
  • Limited or no vesting periods for private investors is a strong sign that a project is poised towards a pump and dump of its token

The “end-game” is too easy to reach

Reaching the end-game too easily would cause players to be bored and choose to cash out. The reason a lot of us game is a sense of fulfilment. Take Runescape for example, the largest Massively Multiplayer Online Role-Playing Game (MMORPG) with over 200 million accounts created. The game catered to players of all levels, from the spenders to the free-to-play users. To get a fully maxed account, users would have to spend months, even years playing the game. Even then, only a handful of players have ever reached this milestone (9712 players as of 2020). This meant that for the large majority of players, there was always something to do in the game to progress, a goal to work towards.

If a P2E game allowed too many players to reach this “Maxed Account” stage too easily, it would leave these players without a goal to work towards, inevitably leading to them constantly cashing out from the game. If this happens too early on, it will destabilise the game economy even before the game hits the ground running.

The game is simply not fun to play but advertises abnormally high returns

The essence of a game is that it is fun and enjoyable to play. Without strong gaming fundamentals that create enjoyment for the player, the only reason that people play would be earning tokens to cash out. Once again, constant cashing out is unhealthy for the game economy.

If a game simply is not fun to play, it is highly likely that they would rely on the earnings aspect to draw users in. Such games often seek to reward their users with abnormally high returns, at the expense of the sustainability of the game.

The current state of the P2E game universe is rather dismal. There are a huge number of P2E games flooding the market that are arguably not actually games — but weak platforms promising payouts with a few clicks. This model may have worked for the first few P2E iterations where new users were none the wiser, but only because of a lack of competitors and success stories creating initial hype. Now, however, the crypto space is at a stage where P2E games are a dime a dozen, and many of these games are trying to ride the P2E hype to make a quick buck. To succeed in this climate, games need to be well-designed and encourage players to keep playing.

Seeking a balance between earning potential and a Ponzi-nature

After all, that is said and done, is it really possible for games to retain the earning potential while curtailing the Ponzi-nature extent that currently plagues most P2E games? Absolutely yes.

The biggest drawback lies in fact, in most game development companies. Many of these companies are familiar with creating conventional games and assume that P2E games are not much different. However, they could not be more mistaken. P2E games require a large amount of time and dedication from the team, specifically when it comes to the game tokens' liquidity and sustainability. Even when things are properly set in motion, the team will still need to actively monitor the situation and step in whenever necessary.

Some good points that P2E games can consider to ensure the sustainability of their game:

Strong Tokenomics with Active Management

Due to the volatility of tokens in general, it is of utmost importance that developers dedicate time to actively monitor their tokens in the early days of the game’s launch.

Examples of good tokenomics include sufficient token “sinks” to ensure that players need to keep spending the token to sustain demand, strong burn mechanisms to keep the token supply controlled and dynamic management of token minting.

Drawing reference to STEPN, multiple sinks are present to ensure that token demand remains sustained, including but not limited to — repairing sneakers after use, levelling up and minting sneakers.

Bringing real value to users

It is clear that a game that only focuses on the money-making aspect is not sustainable. This is because the value of their crypto assets is directly tied to their earning potential. So, in order for the game to be sustainable, it needs to provide value other than simply earning money.

Another layer on top of earning potential is the intangible value of a crypto asset like an NFT. This refers to how many cultural, aesthetic, or social benefits it brings to the holder. The value of in-game items is increased through games cleverly attaching intangible value to them. This drives up the market value of these items without increasing the drain on the liquidity pool, but rather adding to it. Without intangible value, the overall value of these crypto-assets will decrease over time — resulting in a collapse of the in-game economy.

Thus, developers should ensure that games are not only enjoyable but also offer value to users apart from the monetary rewards attached to them. Some examples include networking within gaming communities, mental health benefits and even cognitive development.

A testament to the power of belonging to a community would be the Gamestop stock saga of 2021. By all means, it could only be called a wildly risky investment. Despite this, hordes of people chose to do so anyway. One strong reason (as the phrase which spawned from it “apes together strong” connotes) was that investing in Gamestop meant joining the movement of a “diamond-handed” community, standing strong against the monopoly of Wall Street big fishes. Another example of how belonging to a community can add value is Crossfit. Studies have shown that a primary contributor to the astounding success of Crossfit is that it has successfully created a sense of community and culture, where users pride themselves on belonging to. Relating this to P2E games, creating a strong community where players make friends or even an online home encourages them to continue playing — which is good for the longevity of the game.

Take STEPN for instance.

STEPN’s focus is on bringing both intangible and tangible value to users, positioning the app in such a way that users are rewarded for performing a core activity they would already be doing — moving around.

The earnings aspect acts as an incentive for players to keep active (of which the incentivisation of fitness is a core problem that entire industries are built around). Through moving, users are able to stay active and enjoy the health benefits that come with it. Furthermore, a soon-to-be-implemented feature is the purchase of carbon offsets from game profits, which will be voted on by existing users. This adds to the feel-good aspect of the game, where users can not only earn but combat global warming at the same time.

Using the bonding curve mechanisms to manage game economies

Developers could possibly utilize bonding curves to manage the in-game supply of items. While the idea of a bonding curve is unproven due to P2E games being in their early stage, this could be a viable solution. Simply put, bonding curves peg the supply of a token to a linearly escalating price. The higher the supply, the higher the price. Games are able to utilize this concept not only for tokens but also for other items within the game. As an example, games can implement a bonding curve pertaining to more elusive and rare items. Upon hitting a certain benchmark, the bonding curve will be activated, and prices for subsequent items that are minted will increase as supply rises.

At STEPN, we aim to eventually utilize a similar principle but with a lighter touch, which will be gradually implemented as the project grows.

The future of P2E games

To reiterate, it is apparently possible for P2E games to be sustainable and ethical at the same time, through well-designed tokenomics and value creation. The state of its health is dependent on market forces and user sentiment. It will take some time for P2E games to shed the association with Ponzi Schemes, but with constant oversight and agile management from game developers, P2E games can easily maintain their longevity and stay equitable for all players.

At STEPN we take the longevity of our app very seriously and are taking active steps to maintain the equilibrium of our game utility token GST and governance token GMT.

The total release of our governance token GMT will halve every three years.
Recently we announced our GMT earning mechanics in our community AMA and published them in our whitepaper as well. Read more here.

User growth at STEPN is not a challenge at this stage. With its real-world use case and focus on community, STEPN is finding mass adoption. However, what’s important to us is for this growth to be sustainable. At STEPN we don’t shy away from making tough calls. This is why we have even put the activation code system back again to ensure genuine and sustainable growth. We will make sure that GST and GMT balance is always healthy, and we are able to add value to the ecosystem. We are well on our way to making STEPN the best fitness app out there and serving our community the best way!



STEPN Official

STEPN is a Web3 lifestyle app with Social and Game elements.