In the ever-evolving field of cryptocurrency development, the economic model based on decentralized consensus has brought the promise of the Holy Grail of encryption to countless users. However, as the industry continues to progress, project teams are beginning to consider how to balance the long-term development of protocols with user retention in the midst of the cryptocurrency wave. Points-based incentives have been increasingly adopted by many project teams as a relatively “moderate” incentive model between news and tokens. Many believe that the attention brought by points-based incentives can create organic growth points for protocol indicators and strongly drive project growth.
However, recently, the distribution of TGE (Token Generation Event) in projects like Blast has sparked public anger, as it has led to dissatisfaction with the low return on investment while prolonging the incentive cycle. Wealthy investors have called out these types of airdrops as “top-level PUA” (Pick-Up Artist). Therefore, this article explores the advantages and disadvantages of the points-based incentive model from multiple perspectives and attempts to find corresponding solutions.
Early Incentive Models
In the early days of the wave, during the ICO (Initial Coin Offering) frenzy of Ethereum, airdrops can be considered relatively straightforward. Users only needed to submit a simple 0x address to receive a considerable amount of token income. As the main characteristic of projects during the ICO era was concept speculation, with little focus on on-chain interactions, the address itself could become an incentive indicator for everyone holding tokens.
During the DeFi Summer, Balancer and Compound adopted liquidity mining as a form of incentive. It is evident that for DeFi projects at that time, the scale of on-chain liquidity determined the development of the protocol. Additionally, liquidity demand was also relatively urgent given the market conditions at the time, which is why they adopted direct token incentives. Although they contributed significantly to the growth of Total Value Locked (TVL), it also gave rise to the drawback of “mining and selling.”
The Uniswap airdrop can be considered a game-changer that introduced the concept of interactive airdrops to the cryptocurrency field, giving birth to a professional group of airdrop hunters. Many DeFi projects followed suit, accompanied by the technical implementation of various Layer 2 (L2) and public chains, which brought governance models for the ecosystem to the forefront. As the governance of many protocols is essentially a subset of their token economy, it inevitably generates airdrop expectations for participants. From there, incentive models centered around tokens and interactions began to merge into the cryptocurrency economy.
To summarize, we can conclude the characteristics of early cryptocurrency incentive models:
1. Direct token incentives: For early projects, the growth space brought by the relatively unsaturated competitive environment provides them with enough flexibility to benefit users through token incentives while achieving scale growth.
2. Low interaction barriers: As the on-chain ecosystem was not yet mature at the time, the product models of protocols were relatively simple, making the user interaction process simple as well.
3. Immediate returns (synchronicity): Before Uniswap, many projects used mining to provide users with immediate token rewards for their deposits, allowing users to reap rewards as they go.
The Origin of Points-based Incentives
Prior to points-based incentives, projects faced the dilemma of user retention and incentives as the ecosystem developed. Platforms such as Galxe provided a solution. Specifically, task platforms allowed projects to distribute incentives across specific tasks that users interacted with, using NFTs instead of tokens to some extent. Overall, this incentive method started to create asynchrony in incentives, meaning that the period between token incentives being distributed and actual user interaction was extended. Points-based incentives, like task platforms, are one of the products of fine-tuned interactions in the cryptocurrency field.
The earliest projects to widely adopt the points-based incentive model were Blur and Pacman, which innovatively used points to incentivize NFT trading calculations. These measures significantly contributed to the growth of Blur’s protocol, as evidenced by the increase in liquidity and trading volume. Analyzing Blur’s growth based on the data in Figure 1, we can see that points primarily serve the following three purposes:
1. Boosting confidence: Through points-based incentives, users gain a sense of achievement and confidence in advance, which subsequently influences their confidence in airdrops and affects the initial launch price of the token.
2. Prolonging the cycle: Points can spread users’ expectations of protocol airdrops, prolonging the overall incentive cycle. A clear example is that even after implementing token incentives, Blur still maintained points-based incentives. This created a sustainable incentive environment for users while reducing selling pressure, as reflected in the continuity of trading volume and TVL.
3. Tangibility: Compared to NFTs obtained after completing interactive tasks, points provide users with a sense of token mapping, making users feel that they have obtained tokens rather than just symbolic badges. This is reflected in the correlation between trading volume during early mining and token prices.
Based on the above, we can derive several advantages of points-based incentives:
1. Increased user retention: In the context of “mining and selling” in the past, users usually had low loyalty to protocols. However, through points-based incentives, project teams can guide users to generate continuous cash flow and on-chain interactions.
2. Avoidance of token costs: Points-based incentives reduce the costs for project teams in token market-making and corresponding operations, and sometimes even reduce compliance risks.
3. Greater flexibility: Points-based incentives provide project teams with more flexibility, as they are not affected by the trend of related tokens, allowing them to focus more on product development.
Confidence Created by Points-based Incentives
In the operational cycle of cryptocurrency projects where points are the main incentive model, we can roughly divide it into three stages, with two important milestones being the adoption of points-based incentives and the Token Generation Event (TGE). Figure 2 shows the change in user confidence throughout the project cycle.
Before points-based incentives, we can see that overall confidence showed a linear growth trend. In the early stages of the project, users usually maintain an optimistic attitude towards its development, and there is generally positive news during this period. After implementing points-based incentives, user confidence temporarily increases due to the sense of achievement generated by the points themselves compared to no points-based incentives. However, the points-based incentive cycle begins to spread users’ expectations of project airdrops, and off-chain market pricing for incentives begins. As a result, confidence overall falls back to the level without points-based incentives. After the TGE, users who have experienced points-based incentives will have even lower confidence because the overall cycle of points-based incentives is longer, making it difficult for users to continue bearing the costs generated by the cycle without a clear overall return. This is reflected in greater selling pressure.
In summary, we can see that the confidence generated by points mainly manifests in the early stages of points-based incentives, essentially providing users with an opportunity to enter the ecosystem. However, for user retention, the most crucial part lies in the actions of project teams. Points-based incentives themselves provide project teams with diverse manipulation spaces.
Manipulation Spaces of Points-based Incentives
The current points-based incentive model has fundamentally become a tool for project teams to manage expectations. Since points-based incentives are a long-lasting process, project teams have greater control over expectations.Users will have corresponding sunk costs, which will bring passive retention to the project based on these sunk costs. Therefore, as long as the project extends the incentive period and maintains basic incentives within the period, it can maintain the performance of basic project indicators. In addition to basic incentives, the project’s allocation space is gradually increasing.
In terms of distribution, the manipulation space of points mainly lies in the lack of on-chain and clear rules. Compared with token incentives, point incentives usually do not go on-chain, which gives the project party greater manipulation space. In terms of clear rules, the project party has control over the incentive allocation rights of various parts within the protocol. From the incentive of Blast, it can be seen that a long incentive period represents strong flexibility of the rules, which can minimize the emotional reactions of most users within the period and reduce confidence loss. However, the distribution in the second phase of Blast actually diluted the deposit points of large account holders before going online and transferred this portion of benefits to on-chain participants. For large account holders, such sharing may not cover the cost of early-stage funding through airdrops and increase the on-chain interaction costs in the later stage. However, if they withdraw their deposits, they will face sunk cost issues. And in the final distribution of airdrops, the passive linear release of large account holders has proven that the project party chooses to transfer the benefits of large account holders to retail investors in terms of distribution.
In terms of market pricing, off-chain point trading platforms such as Whales Market provide a measurable data source for project parties. Specifically, they provide substantial market-based pricing for point OTC trading, and project parties can adjust the expected pricing of points through market makers. The low liquidity environment before TGE reduces the difficulty of market making. Of course, such trading also exacerbates the overdraft of potential project expectations.
In conclusion, the manipulation space of points can give rise to disadvantages of point incentives:
– Large manipulation space: Project parties can manipulate enough in terms of distribution and market pricing.
– Overdraft of expectations: The long period of point incentives and excessive speculation in the secondary market consume user expectations for airdrops.
– Sharing of benefits: Due to the long release period of points, the value generated by early participants and later participants is shared, which damages the interests of participants.
How to play to strengths and avoid weaknesses
After analyzing the advantages and disadvantages of point incentives, we can explore how to better construct incentive models in the field of cryptocurrencies based on the point model.
Distribution design
In the long period of point incentives, the distribution of points is crucial to the development of the protocol. Unlike interactions on task platforms, most projects do not have a clear correspondence between interaction metrics and points, resulting in a black box situation where users do not have the right to know. However, completely transparent rules can also provide convenience for studios’ targeted strategies, leading to increased anti-whale costs on-chain. One possible solution is to control the visibility of rules to users through decentralized distribution processes. For example, points can be organically distributed through protocols within the ecosystem, which can further refine the incentives for users’ on-chain behavior while sharing distribution costs. The decentralized distribution rights give specific project parties greater dynamic adjustment space and facilitate users to benefit from strong composability.
Balancing interests of all parties
Currently, many protocols need to balance TVL and on-chain interaction data, which is reflected in the allocation of corresponding weights in the point mechanism. For projects such as Blur, which are transaction-driven or DeFi projects that focus on TVL, the two can essentially form a mutually reinforcing flywheel effect, so the role of points is to incentivize a single metric. However, when this logic is transferred to Layer 2, participants begin to split, and the demands of project parties shift from a single metric to diversified growth, which puts higher requirements on the point allocation mechanism. Although Blast’s golden points attempt to address this split, the overall effect is still unsatisfactory due to allocation ratio issues. In other projects, similar mechanism designs are currently not available, so future protocol point mechanism designs can consider refining incentives for interactions and deposits accordingly.
Trading off demand space for incentive space
Currently, many projects use point incentives with the intention of delaying TGE while maintaining incentive activities. Compared with traditional use cases of point incentives, they lack the purpose of points themselves, and this gap in demand is the fundamental reason why points are perceived by users as just another token. Therefore, effective development can be done for this part of the demand, such as using points to offset related costs for cross-chain bridges or on-chain derivatives. This can not only allow users to immediately obtain the utility generated by points, attract users to continue using the protocol, but also release the space for point distribution and control expectations while controlling inflationary pressure. However, in this aspect, effective and precise measurement is needed between users’ actual interactions and transaction fees.
Furthermore, whether in traditional or crypto fields, demand is always greater than incentives, and a large part of the demand space is generated by the protocol itself. Just like many MEME-related projects without point incentives, they naturally occupy the advantage on the demand side, and users derive more value from outside the protocol when using these projects. Therefore, for project parties, they need to consider whether their product model construction has a corresponding PMF, so that the purpose for users to participate is no longer just for elusive tokens.
Consensus-based incentives
For users, consensus-based incentives create a rule-clear environment for them and allow them to participate in consensus building as independent individuals. For example, in communities, project parties can create decentralized environments for users to participate in free competition and distribute rewards similar to PoW based on the results. Such competition can on one hand dissolve the impact of airdrop distribution cycles in consensus, and on the other hand, improve user loyalty and retention. However, the change of consensus itself is relatively slow and has low flexibility, which may not be suitable for fast-growing ecosystems.
On-chain points
Putting points on-chain is different from directly issuing tokens. Compared with tokens, points eliminate liquidity while adding immutability and composability on-chain. Linea LXP presents a good example. When all addresses and points can be traced on-chain, the manipulation space becomes visibly smaller, and smart contracts provide on-chain composability based on relevant metrics, greatly enhancing the significance of points within the ecosystem, allowing protocols within the ecosystem to adjust incentives based on relevant metrics.
Tags:
Uniswap
Ethereum
Data
Airdrop