A new era of digital loyalty in Web3 is dawning, driven by an innovative points system. Since Blur launched its groundbreaking points program in 2022, teams have embraced this new motivational phrase and capitalized on it. With the launch of each new points program, the program continues to advance in the field of incentive design, discovering new reward mechanisms and incentive behaviors. By 2024, a diverse ecosystem of points programs has flourished, with each project adding a unique touch to the ever-evolving points metaverse. This rapid evolution has created a rich variety of rewards and targeted behaviors that provide unprecedented opportunities for user activation and retention. However, for Newbie builders, navigating the complexities of “integral economics” can be daunting. That’s about to change.

Through conversations with the points issuer and analysis of the 20 long points plan, this guide reveals the benefits, criticisms, and practical applications of the points economy, suitable for both new and old points issuers.

The first part provides an introduction to points, and the second part provides a comprehensive overview of the points economy in Web3.

Are you ready to upgrade your incentive plan? Let’s delve into it.

Part 1: Introduction to Points

What is Points?

Essentially, points are a digital reward unit, the value of which lies in its utility or convertibility into tangible benefits - be it exclusive access, product discounts, or direct monetary value. Strategically deploying a points program is not only to foster loyalty, but also to drive product adoption, amplify network effects, and shape user behavior by accelerating product rise.

Why are points important?

The loyalty program establishes a mutually beneficial relationship between the brand and the users. The company gains loyalty, rise, and data, while users are rewarded for repeated use. Well-designed loyalty programs help drive long-term engagement and deepen emotional connections, both of which are crucial for product defensibility.

Generally speaking, companies/projects in both Web2 and Web3 can benefit from the following advantages in the loyalty program:

Marketing - When combined with referral programs, points can expand marketing channels.

Because loyalty points provide value, they drop the effective price of products/services, enabling loyalty programs to increase the conversion rate within marketing channels and drive the rise of key performance indicators such as the number of active users.

Stickiness/Loyalty - The loyalty program can increase the stickiness of the product, thereby increasing the lifetime value (LTV) of users and reducing churn. Studies have shown that loyal members spend an average of 27% more, so when the average LTV exceeds the cost of loyal members, product stickiness can be achieved.

Market Timing - Dynamic Points Program can help products with network effects (such as social media platforms and financial markets) get started. By rewarding early adopters, companies can improve the user experience (UX) of the product until it reaches critical mass.

Users can also find value from the points program in the following ways:

Incentive value - This value can be expressed in the form of discounts, free products, exclusive access and benefits, as well as currency.

Brand Identity - An effective loyalty program is not only transactional rewards, but also makes customers feel valued and emotionally connected to the brand. The pinnacle of loyalty is when customers feel a sense of psychological ownership towards the brand.

Part Two: protocol’s token economics

Traditional Points Program

Although loyalty programs have existed in Web2 for decades, their adoption in Web3 introduces new dynamics and opportunities. In Web2, we are familiar with loyalty programs such as SkyMiles from airlines like Delta Air Lines, as well as credit card reward programs like Chase Ultimate Rewards. These programs have successfully driven customer retention and spending, worth billions of dollars annually - sometimes even surpassing the revenue generated by the core business of the company! However, Web3 takes the concept of loyalty points to new heights.

Web3 Points Revolution

The first project to introduce points in Web3 is BLUR, which sparked a series of reactions in the Cryptocurrency field in 2022. Many projects have followed suit, some of which have achieved impressive scales.

For example, Eigenlayer’s loyalty program distributes points worth $1.8 billion annually, assuming its total locked value (TVL) of $1.8 billion has a capital cost of 10% APR. Other noteworthy projects include Ethena, the LRT plan (EtherFi, Swell, Kelp), and Blast.

Unique Advantages of Web3 Projects

In addition to the regular benefits, Web3 projects can also gain the following unique advantages from the points program:

Incentives are available upon launch - projects can launch loyalty programs faster than Tokens. This allows projects to immediately provide user incentives and drive up rise from the start. Tokens, on the other hand, require careful design, distribution planning, and timing considerations, which may be difficult to prioritize during protocol launch. Tokens themselves are also products and should not be hastily launched.

Token conversion potential - Points can be designed to potentially convert to Tokens in the future, increasing their implicit monetary value. This allows the team to effectively ‘borrow’ Liquidity from future Token generation events (TGE) to fund current incentives.

Increase Flexibility - The points program allows the team to adjust its TGE schedule, Airdrop allocation, and incentive structure flexibly without hindering the rise. This flexibility enables a more effective Go-to-Market (GTM) strategy. In addition, unlike governance-approved incentive plans, the team can freely adjust the points program. While Token governance is the ideal ultimate goal, in the early stages, the team’s flexibility can become its competitive advantage.

Market Timing - Token issuance tends to perform better in Bull Markets. In Bear Markets, the incentive program allows projects to accumulate momentum and community, preparing for successful token issuance when market conditions improve.

It is worth noting that these benefits are not limited to the situation before TGE. Projects like Ethena and EtherFi have also received similar benefits for their second season reward programs even after token issuance.

Points Program Design

The points program in Web3 has developed multiple complex mechanisms, many of which are used in combination. The most effective programs include behavior, foundation, and enhancement, with some also starting to experiment with reward programs. Let’s delve into each aspect.

Planned Behavior

The plan describes in detail the user’s actions and actions to earn points, such as depositing on L2 or trading on a new AMM. Including:

Unlocked Assets - Assets that users can freely access (such as LRTs, Pendle YTs, sUSDe deposited as collateral on Morpho)

Holding locked assets - Assets that users need to wait for a period of time before they can withdraw (such as locked Ethena USDe, local restaking on Eigenlayer, Karak and Symbiotic)

Provide Liquidity - similar to unlocked assets, but with the risk of passive selling of deposit assets (such as Thruster LP position staked in Hyperlock)

Social interaction - like, repost, comment and follow

Plan Basics

The plan foundation includes the most important details of the points plan, such as the points distribution schedule, timeline, and Airdrop scale. In many cases, the points plan is divided into several seasons, each season typically lasting 3-6 months, with each season having unique basic terms.

1. Distribution Schedule - Points holderlong long time to get points once, as well as the number of points obtained

· One-time reward

A one-time point allocation for specific actions. Used for incentivizing actions and marketing. For example, BLUR provides a one-time reward for listing Non-fungible Tokens within 14 days, LYRA provides a one-time reward for participating in Twitter/X Space activities, and NAPIER provides rewards for social interactions and recommendations.

· Continuous Rewards

Fixed supply issuance - The total supply of points for the entire plan (such as Hyperliquid) or within a phase/season (such as Morpho*) is fixed. While both reduce user dilution, the uncertainty of a fixed plan supply is minimal, and a fixed phase supply allows the team to schedule issuance more flexibly. Teams typically use a fixed supply issuance basis to provide additional assurance to users.

Variable distribution - (such as Eigenlayer, all major LRTs, Ethena, etc.). The total supply is variable and is a function of TVL. Accumulated at a certain point per dollar or ETH participation daily, the variable distribution schedule dynamically dilutes early depositors. Despite the expected Airdrop payments (in USD) attracting new deposits, users hoping to eliminate dilution must increase participation in sync with the total rise in deposits. The team likes this distribution schedule because it eliminates the operational complexity of ensuring fair distribution of points to all participants. To reduce dilution of early users and increase urgency, the team will release a decreasing accumulation rate schedule (such as 25 points per day in July, 20 points per day in August, etc.).

2. Time - Duration of distributing points

· Clarity vs Ambiguity - Most projects provide a fixed points plan/season duration (e.g., 6 months), but some projects provide a range (e.g., 3-6 months). Teams seeking extra flexibility will choose an ambiguous timeline, although this may hinder rise.

· Conditional - Some plans/seasons are designed to end early when key milestones are reached. If the expected season Airdrop allocation is fixed, this will increase the sense of urgency to participate. For example, Ethena had a $10 billion TVL milestone in the first season - this goal was surpassed within seven weeks.

*Although Morpho distributes non-transferable $MOPRHO Tokens as incentives, its operation is similar to a points issuer.

Plan to Improve

Plan elevation is the primary lever for team adjustments, aimed at rewarding users with higher relative point share through specific and targeted behaviors. The following is a list of different elevation mechanisms:

Quality Improvement - Projects can improve the quality of the products of one group of users (e.g. Traders) by incentivizing the “quality of service” of another group of users (e.g. Traders). For systems where users are able to distinguish between “services”, such as Univ3 pools, projects can allocate points based on users’ contributions to the product’s user experience (e.g., Liquidity). Examples include Blur, which rewards LPs with offers closer to the floor price of Non-fungible Tokens, and Merkl, whose incentives favor competitive offers and earn Univ3 LPs with more longMoney Laundering.

Referral - Recommend others and earn a portion of their points (e.g. 10%). This helps with marketing and incentivizes the acquisition of Whales/high volume users. There is a risk of referring oneself through their own Address. Some projects require referral codes to access the application, generating additional marketing hype, although conversion rates may decrease. Examples include Ethena and Blackbird.

Upgrade Recommendation - An extension of the simple recommendation system. Users can earn not only the points share of their referrer (i.e., level 1), but also the points share of their referrer’s referrer (i.e., level 2). The purpose is to encourage users to recommend those who are expected to actively recommend others. There is a risk of recommending through one’s own Address. Examples include BLUR and Blast.

Basic Enhancement - The project can add a magnification enhancement to attract and cultivate a large number of users. The basic idea is that the accumulation rate of your basic points increases with the increase of basic usage, so that you can earn rewards faster under the same usage. Non-mass users will be undervalued and difficult to attract. For example, Aevo has a basic volume enhancement for traders.

Market Launch Boost - The project will use launch boosts to attract liquidity and launch new markets before the network effect takes effect. Launch boosts usually have an expiration date, but other thresholds can also be explored. For example, some LRT projects (such as EtherFi) use a two-week double launch boost for each new Pendle market launch.

Loyalty Boost - Giving extra points to users who pledge loyalty to the product (i.e. proving the use of product A instead of B). This is particularly effective for products that rely on network effects; when competitors’ networks shrink, the relative value proposition of the product is further enhanced. BLUR quickly attracted market share from OpenSea after its launch by leveraging this boost. This boost is more effective for Non-fungible Tokens due to their scarcity, especially when the owner of a collectible usually only has one unit, forcing them to choose loyalty; however, for replaceable Tokens, users can spread their balance across long Addresses to avoid unnecessary pressure.

Random Reward Boost - Drawing inspiration from the Skinner box experiment, some projects attract longer participation and follow through by introducing uncertainty in the size or timing of rewards. The BLUR’s gift reward system uses loyalty scores to determine the rarity*luck* of package allocation. While users do not know the absolute size of the reward, they do know the relative quantity between each package. Similarly, Aevo employs a ‘lucky’ volume boost system, where any user’s transaction has the chance to receive a volume boost, thereby increasing the reward for that transaction; both projects use a tiered boost system, with the highest boost frequency being the lowest (e.g., a 1% chance to receive a 25x boost).

Leaderboard Promotion - To encourage competition among users, the project has set up leadership promotions for the top 100 point earners. This will concentrate ownership of points among the top users, but it may result in higher absolute KPIs as users compete for higher rankings. Although not heavily promoted, Blur used this promotion in the third quarter.

Native Token Lock-up Position Boost - Projects with existing native tokens will offer a boost to holders showing long-term faith. As this may reduce circulating supply, teams should expect increased volatility for their tokens. Examples include $ENA from Ethena and $SAFE from Safe.

TVL Boost - Projects can incentivize user promotion and marketing through points boosts based on TVL rise. Examples include 3Jane, whose AMPL-style points program re-baselines point ownership according to TVL, and Overload, which promises to increase Airdrop distribution upon reaching certain TVL milestones.

Collective Elevation - Incentivizing social pressure and coordination for collective improvement. AnimeChain is the first project to attempt this approach, using Squads as a collective for shared improvement.

Lock-in Boost - In addition to rewarding the past sticky decay plan’s basic schedule, some projects are beginning to try to reward future sticky boosts. Examples include EtherFi’s StakeRank 1-2x boost in the second quarter and Hourglass’s Liquidity lock-in 1-4x boost for different terms.

Plan Rewards

Finally, the planned reward is an immediate benefit other than the expected Airdrop. The speculative drive for future Airdrop has driven the demand for most tokens, but some projects are trying to provide additional utility for token holders, such as the ETH Dividend provided by Rainbow Wallet for token holders.

Although this component is currently small, I believe that a longer team will try point holder rewards, draw inspiration from Web2 mechanisms, such as product fee discounts, event access, and other benefits.

Integrate all elements

The diversity of these building modules makes the design of the long-term plan creative. Once the team has identified its goals (user acquisition, product improvement, marketing, etc.), it can combine long building modules in sequence or in parallel to achieve maximum effectiveness. Here are some examples of creative use cases that go beyond traditional ‘deposit here’ point strategies to enhance Total Value Locked (TVL):

Ethena’s strategy is to distribute points to USDe holder and increase returns for sUSDe holder.

Napier’s strategy is to incentivize social interaction and assets holder of other projects to increase partnerships and expand marketing coverage.

Blur’s market entry strategy utilized various point mechanisms in the long and short investment, quickly establishing supply and demand in the Non-fungible Token market and gaining market share. By using randomly upgraded gift bags, their high-level strategy is as follows:

Users get - Airdrop 0 rewards private beta testers to attract the most active Non-fungible Token traders.

Launch supply - Airdrop 1 rewards existing Non-fungible Token traders with a new listing.

Build supply from loyal users - Airdrop 2 is larger in scale than Airdrop 1, with more longlisting rewards, and provides boosts to loyal listers who transfer Liquidity from other Non-fungible Token markets.

Stimulate demand - Airdrop 3 rewards competitive bidding to incentivize volume.

After designing its points program and market entry strategy, it will turn its attention to program implementation. Points accumulation calculation, data pipeline, price feed, and points data storage are all part of the points program backend. After the backend is completed, the project will focus on consumer implementation, usually a public dashboard displaying user points balance and points leaderboard. Many projects build their implementation from scratch, while others outsource the work to developer shops and other infrastructure providers.

Next, when the project is ready for its Token Generation Event (TGE) and initial Airdrop, they will explore methods for distributing tokens to their point holders. While the Airdrop mechanism is not included in this post, the team should consider Airdrop tokens in the form of options, fixed and dynamic allocations, linear and nonlinear distributions, vesting, Lock-up Position, Sybil prevention, and distribution implementation. Those interested in learning more can refer to this post for a quick grasp of the relevant content.

Criticisms and Shortcomings of the Points Program

Although loyalty programs have proven their effectiveness, they are not without criticism. Loyalty programs are entirely centralized incentive mechanisms. Loyalty point accumulation calculation, data storage, program schedules, and standards are often opaque to users and typically kept in off-chain databases. Therefore, loyalty issuance parties must prioritize transparency as much as possible to build user trust. If users cannot trust the terms of the loyalty program, they will not value these points and will instead hastily chase rewards.

Although for legal reasons, teams before TGE usually cannot disclose upcoming Airdrops or the distribution of points to holders, they can invest in clear communication, timely disclosure of plan adjustments, and quick fixes in case of errors; EtherFi has set a good example in dealing with computational errors.

Other public criticisms, such as Airdrop allocations that are not generous and vulnerable to Sybil attacks, are actually unfair to blame the points program, when in fact it is the Airdrop program’s fault. Points are just a precise way of incentivizing and recording the “share of points” that the user has. Airdrop terms determine how, when, and what kind of remuneration points holders are paid.

As seen in Eigenlayer, users are not dissatisfied with their points balance. What they are dissatisfied with is the conversion of their points into Airdrop and undisclosed claiming criteria. After 11 months of deposit, the points holder only received 5% of TGE, and they feel they have been “farming,” with the returns far below the market average at the time. In addition, many points holders were unexpectedly geographically locked and unable to claim their $EIGEN shares. Despite the team’s complete discretion over Token allocation, they could easily avoid the latter issue by geographically locking the product in advance. The same goes for Blast - users are not dissatisfied with their points balance. Blast Airdropped 7% to the points holders and required the first 1000 Wallets to partially Lock-up Position for 6 months. For a plan of less than 6 months, this is quite consistent with other Airdrop seasons (such as Ethena, EtherFi, etc.).

In summary, the effectiveness of the points program has been proven, but there are also issues of centralization and lack of transparency. The points issuance party should pay attention to transparency construction and properly handle Airdrop programs and legal compliance issues in order to maximize user trust and participation.

Although not a criticism of the planned design, score fatigue has become an increasingly significant issue in the ecosystem, as seen in public forums and private discussions with DeFi Whales. Understanding the value of a score takes time and effort. For each new plan, users need to establish an initial model and continually update their assumptions to ensure optimal returns on their capital or actions. As new scoring plans flood the ecosystem, users struggle to keep up, resulting in fatigue and slow migration between scoring plans. For example, suppose you have two choices: score A with 1,000 units per day or score B with 2 million units per day - which one is more valuable? Is the more valuable one valuable enough to risk investing capital? The answer is not immediately obvious. Projects that cannot immediately differentiate their scoring plans from all others will have weaker influence of their scores.

The last important and quite hidden side effect of the points system is that they tend to mask the fit of the product market (PMF). Points are a good launching mechanism, but they may hide organic interests that are crucial to finding PMF. Even after verifying PMF, the team needs to establish enough organic traction to find the sustainability of the product/service before tightening incentives. Variant’s Mason Nystrom calls it the ‘warm start problem.’ For teams that have not yet verified PMF, I suggest verifying PMF in a closed beta program before introducing points. For teams that have already verified PMF, the situation is slightly more complicated, but Mason suggests that the team ‘take additional measures to ensure that Token rewards are used for organic use and drive engagement and retention rates and other important indicators.’

In summary, although the points program has performed well in the initial stage, the team should pay attention to transparency issues, fatigue of points, and the issue of product-market fit being concealed. By timely communication, a reasonable incentive mechanism, and ensuring organic user participation, the team can maximize the effectiveness of the points program while avoiding potential negative impacts.

Future Outlook

Looking ahead, I expect the points program to evolve to address the most pressing issues, such as program transparency and point fatigue.

In order to improve the total points supply, distribution logic, and transparency of accumulated history, future points programs or some of their content will exist on-chain. Examples of on-chain points implementation include 3Jane’s AMPLOL and Frax’s FXLT points. Another points software provider is Stack, building the infrastructure to manage on-chain points programs.

Addressing the issue of points fatigue is a more complex challenge. While discussions on distinguishing program designs are frequent in private chats and social media, the key to reducing fatigue may lie in enabling users to assess the value of points quickly and confidently. This ability will significantly simplify comparisons between various points opportunities, making decision-making more direct and less overwhelming. Although not part of the points program design, secondary markets (such as Whales Market) can help users price points and reduce fatigue, although their Liquidity is insufficient to support most points exit strategies. However, as these markets mature, they may become indispensable in price discovery, providing exit strategies, and creating a more dynamic points economy.

In general, the future points program will be dedicated to higher transparency and user friendliness, addressing the main challenges currently faced through on-chain implementation and the development of secondary markets.

Conclusion

Points have become a powerful tool in the Web3 ecosystem, bringing benefits beyond traditional loyalty programs. They enable projects to reward loyal core users, initiate network effects, and fine-tune their go-to-market strategies in a more predictable manner. This leads to more effective product development and ultimately creates value for end users.

With the maturity of this field, I expect the design and implementation of the point system to further innovate. The key to success lies in balancing transparency and flexibility, and closely integrating the point system with overall project goals and user needs.

For builders and projects in the Web3 space, understanding and harnessing the power of well-designed incentive programs may be a key factor in achieving sustainable rise. As we move forward, incentives may continue to be a fundamental component of the encryption reward structure, shaping the landscape of Decentralized Finance and other fields.

“Original Link”