The “X-to-Earn” (”X2E”) concept has captured significant attention since 2021. However, many X2E projects are now facing the challenge of declining user engagement. In this essay, I aim to categorize X2E projects into two distinct types, elucidating their differences and exploring the business model pertinent to each. Subsequently, I will present my thesis for a novel revenue model that aims to make certain X2E projects sustainable while also promoting prosocial activities.

Two Categories of X-to-Earn Projects

X2E projects can be split into two types based on sustainability: non-self-sustaining and self-sustaining without external funding. Projects in the former category carry a high risk of devolving into a Ponzi scheme, while those in the latter have a significantly lower risk.

STEPN is an example of the former category. It is a move-to-earn project that pays people to walk or run. However, STEPN requires an initial investment (purchasing an in-app sneaker) for new users, which typically takes two years to recover at the time of writing — An average STEPN user currently earns only $0.06 per day, a considerable decline from the peak of $42.55 recorded in 2022 (source: CoinGecko). Additionally, it’s noteworthy that new users account for a large portion (~15% according to Dune) of all current active users, suggesting that a notable portion of the earnings for existing users originates from new users. This practice, akin to funding returns to existing investors with capital from new investors, is, by definition, a Ponzi scheme.

The way to avoid evolving into a Ponzi is to develop other revenue sources, such as ads, as many free Web2 platforms do. However, my analysis as follows demonstrates that revenue might not keep up with the expanding user base, making the earning potential of X2E projects unappealing. In the case of STEPN, let’s optimistically assume that STEPN could eventually match Meta’s earnings. In 2022, Meta reported US$ 114 million in revenue (source: Meta IR). If all of Meta’s revenue were redistributed to its active users, each active user would receive only US$0.036 per day. This amount is hardly attractive; in fact, it’s smaller than the current payment from STEPN. Examples of such non-self-sustaining X2Es include Move-to-Earn (e.g., STEPN, Sweatcoin), Sleep-to-Earn (e.g., SleeFi, Sleep Future), Eat-to-Earn (e.g., FOOD-FI, Poppin), Learn-to-Earn (e.g., RabbitHole, LetMeSpeak), and Read-to-Earn (e.g., ReadON). The underlying issue is that their “X” activities aren’t value-added activities for which others are willing to pay directly — why would someone pay you to eat?

In contrast, there are X2E projects that can sustain themselves. These X2Es are characterized by a division of users into two groups: producers and consumers, where consumers pay producers for their work. Examples include Create-to-Earn (e.g., Sound, Shibuya), Endorse-to-Earn (e.g., Binance Affiliate Program), Contribute-Data-to-Earn (e.g., Datum, Delphia), and Write-to-Earn (e.g., Publish0x, BULB). Their “X” activities are something that people are willing to pay for, making their sustainability logical.

Many X2E projects have learned the hard way that it’s better to be self-sustaining. Axie Infinity, one of the earliest Play-to-Earn (P2E) games, initially adopted a non-self-sustaining payment model and subsequently collapsed in a Ponzi-like fashion. In response, its P2E successors shifted to a self-sustaining model, wherein some users pay while others earn, granting paying users certain in-game privileges. However, this shift is somewhat ironic, as it essentially brings P2E games back to the traditional “freemium” model. Indeed, self-sustaining X2Es are like old wine in new bottles. Some of these concepts already existed — such as Create-to-Earn, also known as the creator economy, and Endorse-to-Earn, also referred to as an affiliate program — although cryptos can facilitate innovations within them.

Self-sustaining X2Es as Verticalized Marketplaces

Self-sustaining X2Es function fundamentally as marketplaces connecting producers and consumers. Over time, they tend to become more verticalized, catering to specific sectors or interest groups. For instance, Publish0x, a write-to-earn platform, focuses exclusively on crypto content. This specialization enhances the efficiency of producers and consumers finding each other and establishing connections, particularly as more users join and niche markets evolve.

There are two predominant trends among these X2E platforms. One trend involves integrating various non-commerce features to offer users a more immersive experience, exemplified by Sound.xyz. The other trend is to take a minimalist/composability approach and embed the platform into other social apps, as demonstrated by MintyNFTBot.

In general, the success of self-sustaining X2E projects hinges on several key factors:

• The number of producers and consumers the platform connects, and the level of engagement within these connections
• The ease with which the platform facilitates production and transaction
• The competitiveness of trading fees, and the allocation of these fees (value extraction vs. community reinvestment)

These are the critical areas that founders should prioritize and investors should evaluate when involved in self-sustaining X2E projects.

Non-self-sustaining X2Es: The Positive Externality Aggregation Thesis

Above, I mentioned that non-self-sustaining X2Es are likely to end up either as Ponzi schemes or providing inadequate earnings at best, both leading to failure. In response to this challenge and drawing inspiration from the concept of liquidity aggregation, I present below the Positive Externality Aggregation Thesis.

A positive externality occurs when an individual’s production or consumption in a market benefits a third party without direct compensation (see examples here). The essence of the Positive Externality Aggregation Thesis is that crypto-economic protocols, in the form of X2Es, can be architected to incentivize positive externalities. For the first time, these externalities can be aggregated, priced, and traded, with the proceeds helping to sustain these X2Es. This is only possible with cryptos, because:

a) The crypto network is permissionless and borderless, facilitating the involvement of a diverse array of participants in a manner unattainable by traditional organizations.

b) Crypto rails enable arbitrary, bi-directional payment flows, as discussed in Multicoin Capital’s article Unlocking Payments Over Crypto Rails. This ensures distribution of earnings to every participant within the X2E ecosystem.

c) The protocol or DAO functions as a unified entity to market and negotiate the sale of aggregated externalities. This entity enhances bargaining power, unlike fragmented individual efforts.

Traditionally, without cryptos involved, there are some attempts to commercialize positive externalities, but they are far from perfect. Take, for example, the Covid pandemic in Hong Kong, where a strict lockdown impacted industries like catering, hotels, and aviation. To encourage vaccinations, these industries organized lucky draws. However, without “a) permissionlessness” mentioned above, participation was limited to registered locals. The absence of “b) bi-directional payment” rendered lucky draws the only feasible option, benefiting only a handful of winners. And the lack of “c) unified entity” led to organizers reaping most economic rewards, not vaccine recipients. If there were a “vaccinate-to-earn” crypto-economic protocol, cross-border participation would be possible. Industries might need to invest more, yet gain from a quicker return to normalcy, fostering a win-win scenario.

This “vaccinate-to-earn” example also demonstrates that commercializing positive externalities is most effective when targeting their beneficiaries (such as the catering, hotel, and aviation industries in this example), rather than solely through ad revenue as Web2 free apps do. Web2 social apps gather users’ attention and sell it to “attention seekers” — the advertisers. Similarly, X2E projects should focus on aggregating positive externalities and generating revenue from “externality seekers” — the beneficiaries. For instance, instead of relying solely on advertising, walk/run-to-earn projects can consider commercializing through collaboration with users’ employers, insurance companies, healthcare providers, etc. This innovative approach addresses the issue of insufficient earnings in X2Es.

OFFSET by Sweetgum Labs aligns well with the Positive Externality Aggregation Thesis. OFFSET incentivizes users to walk, bike, or use EVs instead of gasoline cars. While it may sound similar to other move-to-earn projects, OFFSET stands out by tapping into the carbon credit market. This market recognizes the positive externalities of “green travel” and facilitates their tradeability. For instance, a person who switches from driving a gasoline car for 10 miles (= 16 kilometers) daily to using an EV or cycling can save around 6.5T of carbon emissions annually. As of 2023, the price of carbon emissions in the European Union’s carbon market has reached around 100 Euros per ton (source). Therefore, a user could theoretically earn about US$700 a year through OFFSET, a significantly more attractive proposition than STEPN’s current earning rate of $0.06 per day.

There is a concern regarding this type of X2E about the prudence of compensating individuals for activities they are already engaged in. This issue is akin to the debate over the effectiveness of issuing coupons to customers who are already loyal. While providing discounts might initially reduce revenue from loyal customers, widespread coupon distribution can increase overall revenue. Likewise, in X2E projects, distributing earnings more broadly, including to those already engaged in the activity X, is likely to enhance protocol revenue and amplify the protocol’s positive impact. From another perspective, people who are already involved in X activities will also serve as role models or influencers on the X2E platform.

Should the Positive Externality Aggregation Thesis hold true, crypto-economic protocols could enable large-scale coordination to achieve specific objectives, not only in building physical infrastructure (“DePIN”) but also in fostering prosocial activities at a large scale. This thesis proposes a novel method to aggregate and monetizing these activities, with the resulting earnings further motivating individual participation. My excitement for these X2E projects lies in their potential to create a market for previously unmonetized prosocial activities, benefiting all involved parties.

Bottom Line

In summary, X2E projects are of two primary types. The first is the self-sustaining variety, functioning fundamentally as marketplaces. Here, certain users earn while others pay. The marketplace will be verticalized to enhance efficiency.

The second type lacks self-sustainability, characterized by a model where all users earn. Traditional Web2-style ad revenue models are unlikely to render this type of X2E project appealing in earnings. To address this challenge, I have proposed the Positive Externality Aggregation Thesis — X2Es that generate and aggregate positive externalities can be commercialized through those who benefit from these externalities. This innovative strategy can incentivize a greater number of individuals to engage in prosocial activities, ultimately making everyone better off.

For those involved in building Create-to-Earn (aka creator monetization) projects, or those contemplating or building crypto-economic protocols aligned with the Positive Externality Aggregation Thesis, I invite you to connect. Please feel free to reach out via DM to @0xHaydon. I am eager to exchange ideas and gain insights into your projects.

ABOUT THE AUTHOR

As a crypto and Web3 enthusiast, Haydon has been committed to the blockchain space through volatile cycles for 5 years. His expertise encompasses token investment, technical development, and in-depth long-form analysis.

With recent experience in both investing (as an angel investor) and operating (as a product manager for a startup), Haydon has also developed well-rounded skills for both sides of the same coin of VC. Previously, Haydon began his career at AECOM, a Fortune 200 multinational infrastructure consulting firm.

Haydon holds an MBA from the Carlson School of Management at the University of Minnesota and a BEng from the Hong Kong Polytechnic University. He speaks English, Cantonese, and Mandarin Chinese.

Connect with Haydon on his website, LinkedIn, and Twitter.

DISCLAIMER

The analysis in this document is for general information purposes only. While I endeavor to keep the information up to date and correct, I make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the document or the information, products, companies, or related graphics contained in this document for any purpose. Any reliance you place on such information is therefore strictly at your own risk.