Tokens would possibly perchance perhaps even be an positive manner to bootstrap networks that need passive user participation, but they would possibly perchance even be counterproductive for these that need active participation

Crypto tokens introduce monetary incentives to technology products. The startup and web3 ecosystem are light thought the implications of this, collectively with how and why that is also priceless. All over this period of experimentation, one theory appears to admire received some steam — tokens are a capability to incentivize early community participants and steer clear of the “cold open concern”. This theory is tempting, but it no doubt is charge thinking thru how broadly relevant it in point of fact is.

Earlier than we dive in, let’s revisit the cold open concern — a eminent concern for products with community results (or “networks”), collectively with Snapchat or Airbnb. On these products, the addition of a user makes the product more priceless for all users. However on day 0, they haven’t any users and, therefore, no utility to present unique users. This forces them to search out creative ideas to reach a foremost mass of users (or “liquidity”) and save a atrocious stage of utility that can then attract unique users.

Tokens are viewed as a capability to circumvent this concern. The following quote is from Chris Dixon’s put up on token incentives:

The basic belief is: Early on in every single place in the bootstrapping part when community results haven’t kicked in, present users with monetary utility thru token rewards to assemble up for the shortage of native utility.

– Chris Dixon (a16z)

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The negate at the highest of this put up (additionally thru Chris Dixon) reveals a visual depiction of this theory. NFX has proposed a identical belief referred to as community bonding theory. In accordance with this college of thought, tokens give early users a monetary incentive to participate in a community. The addition of these users then permits the community to assemble greater its utility and reach liquidity.

Chris Dixon and the a16z team admire cited a pair of examples of web3 networks that efficiently leveraged tokens to reach liquidity:

1. The valuable is Helium, a decentralized community that provides cheap, straightforward web access to IoT gadgets “in the wild” — accept as true with e-scooters and sensors. Hosts would be part of the Helium community by trying for its “hotspot” and connecting it to their WiFi. When they enact that, the hotspot affords web access to complete-users (or house owners of the aforementioned IoT gadgets) — and rewards hosts with HNT tokens.
2. The 2d instance is Arweave, which is described as a decentralized, censorship-resistant storage community. Miners hook up their unused hard power enlighten to the Arweave community, that will impartial then be ragged by live-users to retailer any form of knowledge. Miners are compensated in AR tokens as prolonged as data is hosted on their hard drives. Filecoin and Storj are other, a chunk identical examples.
3. One other instance is Compound, a lending community. Lenders deposit their crypto resources proper into a lending pool for debtors to access. Lenders then salvage pastime on their deposited resources and are rewarded with COMP tokens for offering liquidity to the community.

In every of these instances, the monetary upside of the token used to be a ambitious incentive for early users to take a look at in and assemble greater the utility of the community. However admire you ever seen the one facet that these networks admire in in vogue? They all require passive participation from users, in particular from the supply-facet of their community (no longer very various from the conception that of passive crowdsourcing in data networks). Once users join their resources or resources to the community — whether that is bandwidth (Helium), storage (Arweave), or crypto resources (Compound) — they continue to salvage tokens. That provides them monetary upside and increases the utility of the community at the same time. The provision-facet doesn’t decide to actively make a choice with the community to admire the back of this monetary upside.

Alternatively, networks with passive participation additionally are at probability of be rare. Rather various the networks we train nowadays require active participation — whether they are social networks accept as true with Snapchat and WhatsApp or marketplaces accept as true with Airbnb and Uber. Must you never open Snapchat, you add no model to the community. Must you’ve never popular bookings to your Airbnb itemizing, you add no model to the marketplace. Are tokens an positive manner to bootstrap these sorts of networks?

With out a doubt one of a actually essential principles of bootstrapping a community is to open with the most underserved users. Purchasing users is no longer sufficient to reach liquidity. You additionally need the upright form of users, i.e. these that in point of fact feel the priority most deeply and would save up with any amount of friction to decide on out with your community. At the same time as you occur to salvage these users, process outpaces adoption and the utility of the community grows. Which capability that, the community turns into a good deal more precious for newer users. Here’s extremely foremost for networks that require active participation from users — because liquidity requires recurring engagement, no longer real one-time adoption.

Tokens in general is a blunt instrument to intention this underserved arena of interest because they’ll attract the nasty form of users — these drawn to monetary incentives, and no longer the shut to-timeframe utility of the community. So on a web3 variant of Snapchat, tokens would possibly perchance perhaps well attract excessive schoolers and additionally working consultants, no topic the more or much less users the community wants at that closing date. When this happens, it turns into very sophisticated to reach the necessary density of the upright more or much less users. Which capability that, adoption doesn’t admire an instantaneous influence on community utility and the evolution of community model can compare one thing accept as true with the visual below:

This reveals what happens when there would possibly perchance be a disconnect between monetary incentives and community utility — immediate boost out of the gates, followed by a painful decline. For certain, that is an indecent, theoretical topic. What would this compare accept as true with in the precise world? Let’s make a choice a see at a pair of examples.

When Tokens Meet Active Participation

The most glaring instance right here is Looksrare — a decentralized NFT marketplace that launched in January 2022. It used to be intended to be a decentralized different to Opensea, which dominates the enlighten. Unlike most web3 networks, Opensea is a centralized, web 2.0-vogue NFT marketplace with sturdy community results — as a minimum as prolonged as demand for NFT initiatives remains wholesome. To beat these community results, Looksrare done a “vampire attack” on Opensea, i.e. it distributed (or “airdropped”) LOOKS tokens without cost to excessive quantity Opensea users. It additionally rewarded users with LOOKS tokens for getting and selling definite NFT collections on Looksrare. This roam-to-market (GTM) manner will need to had been sufficient for Looksrare to beat the cold open concern and scale its community. Unfortunately, monetary incentives resulted in user behaviors that weren’t aligned with community utility.

The chart above reveals the friendly quantity of NFTs traded on Looksrare — after filtering out “wash buying and selling”, i.e. the same NFTs traded help and forth between the same wallets to salvage more token rewards. Curiously, friendly commerce volumes began to rupture down as token payouts normalized. By the tip of February 2022, Looksrare’s day-to-day friendly volumes had dropped to da5%3%a>