Greetings fellow degens, in this essay I aim to take you on a tour of the wacky Wild West that is fundraising and user acquisition in crypto. We'll explore the 'yee-haws' and 'whoa Nellies' of initial coin offerings (ICOs for all you cowpokes out there), yield farming extravaganzas, and the new sheriff in town - points programs.
By way of introduction, I'm the local crypto cowboy who'll be your guide. I've been in these here parts for a while and seen my fair share of booms, busts, and everything in between. Over the years I've learned a thing or two about what gets folks interested in newfangled protocols.
*spoiler* some methods worked better than others.
This town is big enough for all of us.
We'll start at the beginning with how traditional tech startups used good ol' fashioned venture capital (VC) cash to buy attention. This worked swell for a spell but tended to get expensive. Then along came ICOs and afforded folks a chance to invest in the new-fangled blockchain networks. This shined up participation but didn't necessarily make folks use them more over the longterm .
Next we'll mosey on over to yield farming, where projects tried incentivizing usage by tossing around tokens like confetti. This was a real hoot and holler for a spell but couldn't last forever without fizzling out. Finally we'll reach our main event - points programs. In my not so humble opinion, points may just be the best contraption yet for luring folks to try out protocols while also funding development.
By the end of our ride, I reckon you will have a better understanding of how projects wrangle users in crypto. Now grab your hats and spurs, it's time to saddle up and hit the crypto trails!
Subsidies Drive Rapid Growth but at a Price
In the early days of web2 start-ups, user acquisition was a major challenge. Without established networks of users, new platforms struggled to gain traction. Venture capital (VC) funding helped address this issue by subsidizing the high costs of attracting and retaining users.
We're burning through cash and it's not magic internet money!
Start-ups would offer their services at discounted prices or even free of charge to boost signups and engagement. This allowed them to rapidly scale user bases through aggressive marketing campaigns and discounts. However, subsidizing users was an extremely expensive strategy that relied on continuous cash injections from VCs.
Once the subsidies stopped or funding dried up, user numbers would often decline sharply as people were no longer incentivized to stay. This model proved unsustainable for all but the most successful start-ups that achieved massive scale. It also concentrated power in the hands of large VC firms that picked winners and losers.
- Uber - Spent billions in driver and rider subsidies to gain market share but struggled with profitability for many years as it battled rivals for dominance.
- WeWork - Grew rapidly through aggressive expansion funded by over $10 billion in VC subsidies but was not profitable. It collapsed when plans for an IPO exposed its financial troubles.
- Quibi - Raised $1.75 billion from VCs but shut down after just 6 months as its content failed to attract subscribers without discounts or free trials to lure users.
For the vast majority of start-ups, burning through millions in VC subsidies without achieving product-market fit was a risky proposition that often led to failure. A new approach was needed to address user acquisition challenges in a more cost-effective way.
Crowdfunding Through Token Sales
With the limitations of the VC subsidy model apparent, a new paradigm emerged for fundraising and user acquisition in crypto - initial coin offerings (ICOs). ICOs allowed projects to crowdfund through the sale of digital tokens to back the development of new protocols and applications.
For the first time, retail investors could gain exposure to the growth potential of early-stage start-ups. Projects raised billions through ICOs, with Ethereum's 2014 sale of Ether tokens paving the way. However, while ICOs successfully raised funds, they did little to incentivize actual usage of the protocols themselves.
So many coins so little product.
People were motivated to purchase tokens based on speculative returns rather than using the projects' services. Without compelling reasons to engage, many protocols struggled to achieve meaningful adoption. New approaches were still needed to tackle the chicken-and-egg problem of attracting both investors and users simultaneously.
- - Raised over $200 million in 2017 but spent years in litigation over its unlaunched mainnet. It was not until late 2020 that the network finally launched.
- - Raised $4 billion in 2018 but its blockchain suffered from performance issues and centralization concerns. It has struggled to gain developers.
- - Had a $153 million ICO in 2017 but its decentralized liquidity network saw little usage beyond trading its own token.
Yield farming emerged as one solution, aiming to drive engagement by rewarding users with inflationary token distributions. Yet as emissions accelerated and token prices fell, the sustainability of this model also came into question. New models continued to be explored as the search went on for the optimal way to incentivize participation and usage in crypto.
Emergence of a New Model: Points Programs
As the limitations of ICOs and yield farming for incentivizing sustainable usage became apparent, a new model began emerging - points programs. Projects adopting this approach rewarded users for engaging with their protocols, not through direct token distributions but rather through a new type of accrual system called "points".
If you're starting to feel like crypto is a game... you're right.
Users gain points by performing actions like providing liquidity, trading NFTs, staking tokens, and participating in governance. These points are not exchangeable for any tangible value on their own. However, projects may periodically convert points to tokens via airdrops to user wallets at an unspecified future date.
The exact points-to-token conversion rate and timing of airdrops are deliberately kept opaque. This flexibility allows projects to dynamically calibrate incentives over time based on network usage goals. It also avoids locking into unsustainable token emission schedules seen with other models.
By introducing an element of ambiguity, points aim to incentivize long-term participation rather than short-term farming behaviours. If executed properly, points programs could drive sustainable adoption while maintaining developers' control over network tokenomics.
Jumpstarting the Network Effects Flywheel
Points-based programs provide several advantages over previous models for both projects and users. For startups, it allows them to raise funds and gain traction among retail investors without running afoul of securities regulations that were a barrier for many ICOs.
By avoiding any direct exchange of capital for ownership rights upfront, points programs operate in a regulatory gray area. This gives projects more freedom to experiment with new forms of incentivized engagement.
For users, points make it possible to get involved with emerging networks earlier without major financial commitments. The opacity around conversions also protects against downside risks if projects fail to deliver.
Perhaps most importantly, points help address crypto's classic "chicken and egg" problem. By jumpstarting usage through accrued rewards, projects using points can generate the network effects needed to attract long-term builders and investors in a self-sustaining flywheel.
It's a problem as old as time but with a crypto vibe.
Early traction begets greater interest, which in turn brings in more users as awareness grows. If executed well, points have the potential to power explosive growth cycles for promising new protocols.
Maintaining Momentum and Trust as Adoption Ramps
As points-based programs continue proliferating among innovative new protocols, their potential is becoming increasingly clear. Projects adopting the model have seen exponential growth in engagement metrics like active addresses, transactions, and TVL.
This success is drawing greater attention and investment from the wider crypto community. Metrics show that protocols with strong points incentives tend to see pumps in their token prices as traders speculate on future airdrops.
Given their track record so far, it's likely that many of the most prominent launches of 2024 will leverage points to fuel hype and drive usage of their networks. Projects who implement points programs skillfully have a significant first-mover advantage.
Personally, I'm keeping my eye on a few projects that use points.
Swell NetworkEigenLayer are two incredibly popular protocols that have leaned heavily into the points meta. EigenLayer alone has managed to pull in over 2,392,258.1069 ETH at time of writing which I'll let you do the math on in terms of dollar value.
However, the model is still untested at scale. For points to endure and mature into a mainstay of the crypto ecosystem, projects must follow through on their promises to users over the long run. Maintaining trust that accrued points will be fairly converted to tokens will be critical to the sustainability of this incentive structure.
There are a few potential downsides to consider with points-based programs:
Are you a worrier? I'm a worrier.
1. Lack of transparency - By keeping conversion rates and timing opaque, projects take on trust responsibilities that could backfire if users feel taken advantage of.
2. Unsustainable incentives - Like past models, points may incentivize unnatural activity bubbles if emissions are not calibrated properly over time.
3. Legal ambiguity - Regulators in different jurisdictions may come to view points as a security, restricting projects and sparking regulatory action.
4. Manipulation risks - Without proper controls, points could be gamed or farmed artificially, undermining the integrity of incentives.
5. Adoption challenges - It remains to be seen if points alone can drive sustainable long-term engagement at the levels needed for protocols to succeed.
6. Over-proliferation - An excessive number of points programs could lead to confusion, dilution of engagement across many networks.
Overall, while promising, points will need to be implemented carefully and evolve further to address these potential pitfalls as the model matures. Maintaining user trust will be paramount.
Alright pardners, we've come to the end of our crypto trail ride. As I gaze out across the points program landscape, I gotta say it's shaping up to be quite the wild frontier!
These here newfangled programs are attractin' folks to protocols faster than a saloon girl draws in cowpokes. With metrics showing exponential growth, it's clear points may just be the future of user wranglin' in crypto.
Only time will tell if points can sustain long-term participation at the levels needed. But for now, they're provin' mighty effective for prospectin' out new networks. With care and innovation, I reckon points have the potential to settle this wild frontier for good.
I went to the desert on a horse with 3 legs...
