Economic value creation on blockchains: the REAL truth about "Drug Wars" (and other Steem apps)
I few weeks ago, I was browsing steem in bed before going to sleep when I got drawn to a post by @themarkymark titled "The bitter truth about Drug Wars". After reading it, I jumped out of bed, followed by a puzzled gaze from my wife. "I need to write an article on Steemit" I said, as an explanation.
The reason I'm writing this is to argue against a misconception. @themarkymark's analysis, while correct on the surface, is, in my opinion, missing the forest for the trees. As long as people do not understand what's different and special in blockchain economic value creation (usually called "cryptoeconomics"), progress will be slow.
In a nutshell, Malcom says that:
- if you play Drug Wars in order to earn steem,
- then you need to be aware that your gains will have to come from new players "injecting" steem in the game after you.
This, Malcom says, resembles a Ponzi scheme.
Since I'm arguing in this post, I thought an image of "happiness" might be able to compensate and make the reader more relaxed ...
I left this unfinished post in draft on Steempeak and only returned to finish and published it today. Many things have changed since Malcom's post (including the "half-departure" of Drug Wars from steem). Yet I came back and brought some small changes and published it.
My post is NOT about Drug Wars. I never played Drug Wars (not the historical version and not the steem-based one either). This post is about (crypto)economics. Specifically, about an aspect which the above-mentioned article illustrates, but which goes much further and deeper than Drug Wars. It's about understanding one of the many reasons why blockchain revolutionizes economics and value creation.
@themarkymark's analysis is, in a sense, correct in the details ("wins the battle") but in fact shortsighted and wrong in the big picture ("loses the war").
In substance, he assumes that people (most? some?) play Drug Wars in order to earn steem, and he then proceeds to explain that:
- the simple overall maths of the game (20% of all the steem injected by players in the game is taken out by the development team) make it that the for players to earn steem, there needs to be new players entering the system
- such a mechanics where the returns of the early entrants is paid for from the steem of late entrants reminds him of a Ponzi scheme
And that people need to understand "the reality of how the economics work (or ultimately don't)."
Well, what I can say is that @themarkymark's analysis is ... too clever by half ...
First of all, yes, his calculations are correct. Probably, I didn't bother to verify them, I assume they are correct, but ultimately they do not matter. They are ... "duh!" Drug Wars does not create steem, it uses the steem created by the blockchain (and brought inside the game by players). As the increase in steem supply is below 20% and the Drug Wars development team takes out that percentage, you don't need to be a math genius to see that, unless new steem is continuously brought in by players (old or new), the total steem available to players is constantly decreasing ... So by definition, not everybody can win ...
If you want an extreme, think of a lottery: everybody pays in, the lottery system takes a "developers' cut" and then what remains in the "reward pool" is distributed to the lucky winners. Ultimately, there is little reason to imagine any game being fundamentally different from a lottery. In Drug Wars, if I played, my expectation would be that the distribution is not done completely random like in a lottery but based on some skill I could display when confronting other players so ultimately "my win" would be "their loss" - a contest of skill where the victory would be measured in steem gained from the lesser players.
If all players had similar skills (or the game would be too easy to differentiate) then overall, all players would lose steem ... unless
- the developers' cut would be lower than the steem creation rate of the blockchain
- new players would continuously bring more steem in the game
So yes, clearly, if you only play Drug Wars for the "ROI" not for the fun of the game and if you are not "better than the other players" - as assessed by the game - then you are going to lose steem ... Re-duh!
What's a Ponzi scheme?
At SteemFest 3 in Krakow I met a very bright steemian, @apshamilton who, being a lawyer, explained that one of the court victories he's most proud of is one in which the company he was working for was accused of being nothing more than a Ponzi scheme. By going deep, with a legal mind, into what differentiates between a legitimate enterprise or a Ponzi scheme, he managed to demonstrate that the company he was defending was legitimate.
He'll certainly be able to explain this much better than me but it boils down to whether a significant number of customers engage that venture for something else than the hope of a financial return.
So if you sell "put money to make more money" you either an investment scheme (which could be legitimate) or a Ponzi scheme.
If you sell "put money to play and have fun" you are a game.
What are you though if you sell "put money to play, have fun AND earn steem" ? Well, you could be a gambling scheme but hardly a Ponzi, unless the gameplay is so inept that everyone sees it's just a thin veil ... Do you call the lottery a Ponzi? The Roulette at the Casino? The slot machines? No, they are providing some fun and they cost money
The first error I see in @themarkymark's analysis comes from assuming that "people (implicitly: all or most) play Drug Wars to earn steem". That might very well be correct, but:
- That would make Drug Wars a gamble, not a Ponzi (Ponzis are illegal even in Nevada)
- If you start from this assumption, then you end up demonstrating ... your own initial assumption
I believe the right approach would have been to analyse what percentage of Drug Wars players come to play and have fun versus those who "invest" in it to earn more steem?
Economic value creation
Even the Nevada gambling industry adds to the GDP and the economy. That is because of its "positive externalities".
People go to Vegas to play the slot machines and lose money, that might not look great. But they also take the plane to Vegas, stay in hotels there, eat there and maybe spend on something else while in Vegas. This creates economic activities and jobs in Vegas. It makes the Las Vegas area more prosperous. It draws investment in the area.
In the end, doing the accounting in steem, as @themarkymark does in his post about Drug Wars, is shortsighted for as long as we won't be able to buy bread with steem. Steem is not real money and that is a shortcut which is not worth taking. Steem is an internal unit of account and a means to an end.
True accounting is what allows one to not "focus on trees" and instead "see the whole forest". And this should be done in fiat. This makes a big difference especially in a case as the one of Drug Wars (but also when we discuss Bid Bots as I did in a previous article.
The lesson for Steem
Because you cannot "pay for living your life in STEEM" (yet) and you need sooner or later to sell STEEM and get fiat, the analysis Malcom does for Drug Wars (using steem-based accounting) can be transposed, mutatis mutandis, to steem itself: we do not create fiat so STEEM's fiat value depends on people continuously injecting fiat into it. Why they would do so is because it brings them some form of satisfaction, fun, entertainment, learning, in short: value
The only way for steem to succeed is to build "culture". To have people who do stuff which they value, which makes them feel good (like playing a fun game or posting their holiday pictures) and are also good for steem (generate "positive externalities") regardless of whether they make business sense.
It makes no business sense for football supporters to go watch a match of their national (or favorite) team and spend money and root for their team. Yet they do. The Dutch in particular are said to be particularly stingy (that's the typical cliché, hence the expression "going Dutch"). Yet their are among the most beautiful group of supporters of their football team. Do they apply "business sense" when spending money for a game ?
If steem managed to create this feeling of "belonging to a community", it would be successful. I believe (I hope I'm wrong) that it's the only way it can be successful.
- Steem Social Lab: we need a "charter"
- Steem Social Lab: the S. Zizek vs J. Peterson debate - part 1
- Understanding blockchain's social impact
- How I learned to stop worrying and love the Bid Bots
- Revisiting Steemland: a fairer and more transparent art market as a new "export"
Blockchain, Crypto and Society
- Why Blockchain Is a Revolution
- A New Hope
- Hack Your Life in 3 Easy Steps!
- The Holy Blockchain
- Blockchain revolution: Money and Credit
- Small worlds
- The Press needs to be Freed from the Tyranny of Money
- Blockchain and the End of the Western Civilization
- The Church of Bitcoin
- The Ressolid Project
Other posts you might enjoy:
- Help Yourself! (steemit for dummies)
- Steem crypto-economics
- Best way to Grow on Steemit
- Turn up the Heat! Steem Luxembourg
- Spammers gonna spam - focus on original content!
- The best time to publish is now
- Historic evening: first beer paid with SBD in Luxembourg (+ Fr)
- Steem $10Bln!
- Setting up a new Witness Node!
- Why would anyone burn a bear? - SteemFest 3
- Steemit and the Fractal Society
- Game Theory 101 - Schelling point or "Why Steemit.com is important"
- Game Theory 102 - Blockchain and Cooperative Games
You might also want to check out
- my “lighthearted” account, @sorin.lite, perhaps you’ll like what you’ll see.
- the Ressolid account
- the Witness account, @lux-witness (and even approve it, perhaps)