PROGRESSIVE OWNERSHIP: A NEW USER LOYALTY MODEL WITH TOKENS
The article you are about to read will be divided into two parts to thoroughly address the new token distribution model called 'Progressive Ownership'.
In this first installment, we will explain the history and current cases of token distribution models and establish a solid foundation to fully understand why there is a need for a new model.
Without further delay, we present the first part of our article.
INTRODUCTION
The use of tokens as incentives for users has been pivotal in the early days of blockchain networks, such as Bitcoin and Ethereum, which have laid the groundwork for the current infrastructure. However, throughout history up to the present day, we have yet to see a solidly proven alternative model for effectively utilizing tokens to increase adoption by real users.
In several cases, token distribution has had a negative impact rather than driving growth, primarily attracting speculators and opportunists instead of genuine users. This imbalance has led to a mismatch between token supply and real demand, which in turn has created difficulties in proper interaction between the product and the market. These failures have led many to consider the use of tokens as an implementation error.
However, it is important to recognize that current challenges in token distribution do not invalidate their potential. Rather, they underscore the need to develop more sophisticated models tailored to market realities. The key lies in designing incentive systems that foster organic and sustainable adoption, promoting genuine user engagement and avoiding excessive speculation. In this way, tokens can become a powerful tool for driving growth and long-term viability of blockchain networks and their applications.
The term "progressive ownership," coined by Li Jin and Jesse Walden of the Variant investment fund, refers to a model that allows users to have greater control and ownership over their digital assets as they meet certain specific criteria or conditions. This approach is designed to encourage active user participation in the network and reward their contribution.
HISTORY OF TOKEN INCENTIVES
We are going to explore the evolution of token incentives from the early days of the Bitcoin blockchain to the present. Throughout this history, we will identify and analyze the problems that have arisen with previously used token distribution mechanisms.
1. Proof of Work (PoW) (2009-present):
This distribution model is applied in blockchain platforms, especially in the case of Bitcoin, the first blockchain project. Bitcoin introduced the Proof of Work consensus algorithm, in which "miners" use infrastructure resources to secure the network. In return for this service, they receive tokens (BTC) as a reward, which represent ownership in the network. In this system, miners who allocate more computational power have a greater chance of receiving rewards. This token distribution approach through Proof of Work has been adopted by many other blockchain projects.
The Proof of Work era demonstrated the effectiveness of token incentives in initiating supply in blockchain networks, especially where the value contributed can be quantified, as in the case of the processing power of the hardware used by miners. Therefore, this model is particularly suitable for blockchain infrastructure solutions, where security and transaction verification efficiency are paramount.
2. ICOs (Initial Coin Offerings) (2014-2018):
During the era of Initial Coin Offerings (ICOs), blockchain projects found a way to raise capital by directly selling tokens to end-users, evoking a parallel with the sale of company shares. This modality allowed projects to access funding without the intervention of intermediaries, enabling them to reach a broader audience of potential participants.
While this model generated significant interest, attracting investments and leading to the proliferation of new projects, it also sparked speculative fever. For example, Ethereum was partly funded through an ICO in 2014, serving as inspiration for numerous subsequent projects, including prominent ICOs in the years 2017-2018, such as EOS and Bancor. However, the era of ICOs was marked by fraud, theft, and a widespread lack of accountability. The failure of many of these projects, along with increasing regulatory pressure, eventually ended their popularity and widespread use.
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This period highlighted the need to design and distribute tokens in a way that prioritizes community alignment and promotes long-term development, rather than focusing solely on capital raising. This approach can be applied to both infrastructure projects and decentralized applications, seeking to build solid foundations for a sustainable and prosperous blockchain ecosystem.
3. Airdrops (2020-2023): Early Use
Since 2020, many projects have begun designing tokens that include governance rights, retrospectively distributing them to their users to achieve an appropriate level of decentralization. This emerging approach arose in response to suggestions from the U.S. Securities and Exchange Commission (SEC) that Bitcoin and Ethereum should not be classified as securities due to their sufficient level of decentralization.
Unlike the Initial Coin Offering (ICO) era mentioned in the previous model, where tokens were distributed as a form of monetary investment, airdrops reward users with tokens for their usage history and participation in the platform. This approach marked the beginning of the "DeFi Summer" in 2020, a period characterized by the emergence of decentralized finance (DeFi) projects. In these DeFi projects, users could participate in token distribution, as well as activities such as liquidity mining (i.e., providing liquidity in a financial market to earn tokens) and yield farming (selling the tokens obtained to make short-term profits).
While airdrops represented a significant improvement in the ownership distribution model by focusing more on users and the community, they present a significant challenge. The problem lies in requiring little commitment from users, which can lead to a lack of significant participation in the platform or the underlying project. Additionally, it has been observed that most users receiving airdrops tend to use them as an opportunity to make quick monetary gains, selling most of the tokens shortly after receiving them. This can negatively affect the stability and long-term growth of the project, as users may not be as committed to its success or ongoing development. Therefore, it is important to strike a balance between token distribution and user engagement to ensure that distribution is truly beneficial for both the community and the project as a whole.
In the airdrop model, tokens attracted bots and short-term mercenary users driven solely by economic incentives, rather than placing ownership in the hands of users aligned with the long-term success of the project. Overall, there is no user loyalty; they seek to claim and sell the tokens as quickly as possible, which sends negative signals against the product-market fit and contributes to price boom and bust cycles.
In turn, in various projects, in order to meet a decentralization test, some saw their founding teams step aside. The result was that decision-making was left to the community (token owners), and what happened was that most token holders did not have the time or context to fully understand what was being voted on. So before and even after reaching product-market fit, projects needed founders to continue iterating rapidly. Airdrops often turn out to be a mismatch between a startup's growth strategy and organizational execution.
The airdrop era was characterized by the pursuit of sufficient decentralization, although in many cases, this diverted projects' attention from the crucial product-market fit process. To achieve more effective token distribution, efforts need to be directed towards active users, those who genuinely influence community dynamics and have a greater impact on project development.
This approach can be applied to both infrastructure projects and decentralized applications.
We conclude the first part of our article. We hope you found this introduction informative and valuable for understanding token distribution better. In the second part, we will explore more detailed aspects and delve deeper into the new token distribution model "Progressive Ownership".
Stay tuned for the continuation of our analysis in the second part.
See you in the next installment!
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