Ponzi Economics in the Blockchain World
Ponzi Economics in the Blockchain World
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Key topics this article will cover:
What is Ponzinomics and how does it work?
Which games have suffered the most from Ponzinomics and how was that exemplified?
Our thoughts on Ponzinomics over the last year or two
Detriments of the "Get-Rich-Quick" Mentality
How economically sustainable are in-game NFTs if games do not typically have long life spans?
What criteria must be met for these blockchain games to be adopted mainstream by someone who doesn't necessarily play a combination of both of these games?
Conclusion
What is Ponzinomics and how does it work?
Ponzinomics is essentially a trait in projects where the primary motivation for a lot of participants is financial gain. It is not so much about caring about the underlying activity of the game as it is about making money off of the project. In doing so, having that experience of financial motivation be the main driver, means that the value added to the game is driven by all these users coming in. So we end up with a zero or negative economy. After all, if someone's making money, it is because somebody else is buying in, rather than there being any real value generated by the project.
In some cases, it's not a classic Ponzi scheme where people are defrauded or don't necessarily realize that this is how the cycle works. There are situations where people are aware of it. However, in many cases, it is somewhat apparent that a lot of these gains are driven by speculative investment, so it's not considered a clear deception. It is a worthwhile point to say that perhaps the perception of Ponzinomics within blockchain games has changed over time.
We have looked through Linkedin and Twitter, and unlike six months ago, we are seeing lots of commentary on this topic. In the beginning, there was a lot of hype and exciting information coming out. In reality, no one was talking much about the economics at hand. Now we have moved to the subject of economics, and that is when we can talk about Ponzinomics and Ponzi schemes coming into the mainstream.
Which games have suffered the most from Ponzinomics and how was that exemplified?
The most prominent example is Axie Infinity. There are other games that have mimicked that model like Pickaxe, where they stepped in and took the core activity in a different direction. They used the same token model but had a system where users are reliant on other users buying in. This is in order to encourage either purchase their NFTs or purchase the tokens that users generate through gameplay. It created a focus on continued growth in the game.
It is not a sustainable setup.
You need to have a game where there are participants who are adding value that's not tethered to pure financial motivation.
Everyone is reading or playing and able to earn tokens without sound limitations in place to make sustainable or good value drivers. Based on the white papers of these games, it is clear that NFTs lack a real burning mechanism. It's hyperinflationary and there is no way to limit the number of NFTs. Typically, if we use analytics platforms like Dune, or we take a look at NFT inflation either in a game like StepN or Pegaxy, we see an exponential growth curve due to the lack of burning mechanisms.
That's a positive signal or indicator for attracting people who are not familiar with blockchain games, but are interested in playing a blockchain game and owning an NFT, yet do not want to be involved with Ponzinomics. Recognizing that element or mechanic is the key.
We recommend you take into account your experience reading white papers as well as your study of games and their economies. Are there specific pieces of information included in the white paper that you think people should pay special attention to?
The most pertinent thing is to start looking at fundamentals first; not worrying about economics or sinks and burns, but rather starting with the core experience. Questions you should ponder on include:
What does the core gameplay look like?
Is it a step into some form of exercise?
What if you strip away all the earning component blockchain component and just look at this for productivity - is the game still engaging?
We apply this monetization test to see if the game is ignoring blockchain completely. You have a core game - how would you monetize it if you think that you could be successful in getting people to shell out money for assets in this game, for example, with microtransactions? If the answer is 'highly possible', then this could potentially be a viable investment, because there is a fundamental demand for these assets out of pure enjoyment of the game.
But if you think that people aren't actually willing to buy these assets and you would have to monetize, for example, through advertisements, then if you now apply the blockchain earning components to it, if you realize that no one is inclined to pay for these assets for just pure enjoyment, what you are now left with is users are only willing to pay for now, because they think they can earn something.
This means there will only be a financial drive that leads to the Ponzinomic cycle. Hence you have to ensure that people will be willing to spend on these underlying assets which are likely to be a real value injection into the ecosystem. Understand that there is a valuable core component underlying the economy, so there is some potential for a positive ecosystem.
Our thoughts on Ponzinomics over the last year or two
There is a large subset of people who are attracted to the crypto space who just have extreme risk preferences.
You can place like any trader somewhere on the spectrum of their level of demand for risk and reward. You have very conservative people - they are just looking for something safe and will stick with bonds. There are also people who are attracted to crypto's wild side, who are looking for a really high-risk reward, even past someone who just buys bitcoin as part of a strategy. They want something that boasts an insane potential upside that comes with an insane amount of risk.
These kinds of Ponzinomics setups are in demand, where they do not have to rely solely on value addition to justify it. Instead, they can get an insane potential return just based on the fundamental Ponzinomics of other people buying in.
This dates back farther than just this past year or two. We have seen Ponzinomics cycles happen and reoccur just with potentially different themes or different wrappers on them but just covering up the same potential Ponzinomics underside.
An example of this was the hot potato NFT craze in 2018 - the very early projects where people would just spin up a website. The NFT was listed on the website for twice the price if you bought it before even OpenSea got underway. You have no involvement with that at all, so basically you just want to be there first and not be the last person to hold the bag. People may start out interested in acquiring them, but their interest may wane after a week or two.
After a while, it grew to the point where you needed to be on the website in the first two or three minutes, to have any chance of making money. This was a craze that was big and yet died out in 2019.
There were crypto casinos that had a token twist, so you could mine tokens by gambling, and then holding or staking the token. You could generate future profits. That got copied over and it turned into people continuously playing on the site for the first day or two after its launch. Those people then sat on the tokens, waiting for future players to join in, so there would be many casinos.
The entire model fell apart in 2020.
There were all sorts of yield farming setups - that were primarily driven by Ponzinomics again - of users entering in. This high-risk segment of participants is fundamentally interested in getting Ponzinomics set up and waiting for any updated versions to come out.
As we see, these are Ponzinomics wrapped in different wrappers, fulfilling this fundamental need.
Detriments of the "Get-Rich-Quick" Mentality
There is a lot of get-rich-quick mentality within crypto, perhaps because it is a part of human behaviour. Because cryptocurrencies are not well regulated, they may facilitate Ponzinomics and pump-and-dump, as well as rug pulling. A distinguishing factor is the availability of NFTs within the game for people who are not necessarily within the space, so it is an interesting investment to make. As long as the game is not a Ponzi scheme and the team is dedicated to sustainability, there's plenty of potential for blockchain and NFT technologies to be used within the gaming space.
We think that this "get-rich-quick" mentality has hindered the progress of blockchain gaming. Now, we are slowly starting to see an evolution towards building games that are in fact sustainable - or attempt to be sustainable - and that's one of the things we do in economics design.
We also think that there is a lot of opportunity to come, in terms of seeing these types of technologies implemented in a successful way - one which does not suffer from Ponzi dynamics. We are looking at a new idea that has little to do with semantics and the language used. This is because Ponzi is a word used to describe getting in early and then selling your bags before others.
On the other hand, a Ponzi scheme is by definition, making an investment and expecting a return on that investment, fueling a return on investment for someone who came before you. So we think there would be an interesting point to be made by creating some updated terminology around what is Ponzinomics. In addition, we think there should be a better and more inclusive definition to express what that means within blockchain gaming as an industry as a whole. In our view, it is about expanding it to include general scenarios of zero-sum ecosystems so that there is no real value added from just looking at it.
As it is purely based on financial incentives, there are different kinds of token models and different ways money is transferred between participants. Therefore, the mechanics of it differ, but this overall umbrella of Ponzinomics is understandable since it covers situations where there is zero or negative return.
The goal was to come up with a different idea - that the value of something is essentially what another person is willing to pay for it. That could be collectable NFTs, like stamp collections, for example.
What else did you miss?
How economically sustainable are in-game NFTs if games do not typically have long life spans?
What criteria must be met for these blockchain games to be adopted mainstream by someone who doesn't necessarily play a combination of both of these games?
Conclusion
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Kiefer Zhang | Associate Consultant
E: Kiefer.Z@EconomicsDesign.com | W: EconomicsDesign.com