Prologue

Crypto incentives have always had the potential to be an incredibly symbiotic tool for aligning users and projects. After all, there is no easier way to reward early supporters than by giving them a share of your project’s equity. Bootstrapping network effects is hard, especially for applications that require large user bases, such as social media. People posting on Twitter around 2008 surely took a leap of faith and, in many ways, were instrumental in this social network’s success. Unfortunately, redistributing shares of a company on a US-listed exchange to users across the globe is impossible - so early users didn’t really get to participate in Twitter’s rise financially.

Token distribution mechanics allow projects to sweeten the deal for early users and supercharge their network effects. However, the industry evidently turned this into a PvP arena—users vs. projects, projects vs. projects, sybil farms vs. users. It can even be argued that crypto incentives models encouraged vampire attacks and drove disloyalty.

The Holy Grail of incentives design is a symbiotic, value-accretive alignment between protocols and users. Obviously, it is hard to achieve—for example, web2 social media advertising is essentially trading users' attention between products and ad placement providers, with barely anything accruing to the user.

Crypto, with its ability to distribute different forms of monetary value instantly and globally, has the potential to be on the cutting edge of incentive alignment. However, with every heavily sybilled airdrop, more and more people are disillusioned if the model will ever work properly. The vision of the Holy Grail blurs and fades.

But what if things were different? What if we took the (arguably) best system for human coordination -  a marketplace, and applied it to crypto incentives?

Knights of the Round Table

Knights of the Round Table were King Arthur’s closest companions and allies, who were entrusted to protect his kingdom and, later, to find the Holy Grail. Knights of the Round Table were legendary heroes, Arthur’s relatives, and even some of his past enemies.

One of the pitfalls of the current crypto marketing meta is adverse selection. As most campaigns are open to everyone, predatory users have the option to come in and loot the incentives without any intention of ever using the product organically.

This is because most campaigns and tools work with local reputation only (borrowing the terminology from Kehrman Kohli, go read his Substack, it’s very good). Local reputation means that everyone essentially starts from zero and gets points/incentives based on their product actions.

Actions can be straightforward, such as providing liquidity or trading volume, or more obscure, like contributing to GitHub or grinding a Discord role. Goodhart’s law states that "When a measure becomes a target, it ceases to be a good measure,” which, in crypto’s case, can lead to funny outcomes, such as people starting to correct what they perceive as typos in projects’ GitHubs, leading to a mess.

A myopic focus on local reputation is slightly hilarious if viewed from a different angle. It is akin to King Arthur coming to 100 random people on the street and saying, “Okay, boys and girls, we are going on a quest to find the Holy Grail.” Not only does this reduce the chances of Arthur having the majority of his party being brave and pure knights, but it also opens the king up to adverse selection from marauders and thieves joining the quest only to betray him later.

Of course, Arthur chose only the bravest and noblest knights from Europe to join him on his quest, which is an example of global reputation. Similarly to knights proving to be pure because of their previous heroic deeds, projects need to filter for quality users depending on their onchain histories, proving their value and onchain expertise. Thankfully, we already have an immutable public ledger allowing us to see the deeds of every wallet.

King Arthur didn’t discriminate - he invited a diverse group of knights, not limiting himself to English nobles. In the same vein, regardless of their ecosystem of choice, power users should be able to prove their status and receive offers from projects across all chains.

Tradable Attention

A marketplace is a medium of value exchange between two parties - so, to explain the mechanics of an onchain attention marketplace, let us define the offers and bids first.

Users offer their attention, time, and liquidity to projects. How much they can ask for their attention depends on the following factors:

• How much liquidity they can supply or how much fees they can generate

• Onchain history across multiple chains

• Third-party onchain identity certificates

• Participation in different onchain communities

• Their historical conversion and retention rates

• Social reach

However, what matters the most is whether the user is active and converts well - if someone has high DegenScore and Gitcoin Passport, but never converts to a paying user, did these pointers even matter? After all, what good does a perfect longsword do if the knight does not possess the skill to wield it?

Conversely, projects bid a certain amount of incentives to acquire a user, which, in practice, means buying their attention. Attention value is not only determined by the user’s onchain identity, but also by market factors - for example, during bull markets, acquiring attention is more expensive since everyone is excited and showered with offers.

Using marketplace-like foundation for incentives brings the following efficiency improvements:

• Finding a fair value of a user or user type

The marketplace model helps bring supply and demand into balance. If a set of onchain behaviors (or a user type) converts well, projects will target it more. This will inevitably lead to saturation (example: every project targeting Pudgy Penguins holders), leading to worse conversion, and less targeting demand. Projects will have to search for another set of onchain pointers to target; marketplace helps everyone see and access fair value.

• Rewarding organic behavior

If users do things onchain organically, they get more offers from projects to acquire them, leading to a positive feedback loop. Contrast this to current models of local reputation, where users are forced to follow a set of rules of a new incentive program or campaign.

• Disincentivizing sybils

If longer onchain histories and valuable actions aren’t being recognized or provide any value to users, it incentivizes people to create new wallets to try and game non-linear airdrops and point programs. Users must have a clear monetary reason to unite all their activity under one onchain identity. In the future, ZK proofs might even allow users to do that without losing privacy.

Only Pure Can Enter

And anon came down a voice which said: “Knights of full evil faith and of poor belief, these two things have failed you, and therefore ye may not come to the adventures of the Sangreal.”

If the conditions for receiving divine blessings were wearing armor, wielding a lance, and riding a horse, there would be many sybils pretending to be knights trying to gain a blessing they have no business acquiring. But, as we can read in the legend, conditions include having strong faith and a pure heart, which is not as easy to sybil.

In our case, this means previous onchain history, onchain community participation, and all other pointers that show why a certain user might be interesting for projects to acquire. It is easy to fake transactions on a chain, but faking participation in a closed onchain community is much more time-consuming and costly - making this community a valuable anti-sybil pointer.

What made this points meta so tiring and frustrating was the fact that people had to repeat the same set of behaviors for every ecosystem or product they started to use. Oh, you want to try a new product? Well, you are starting from zero again—retweet the posts, join Discord, deploy to a vault, and so on.

By limiting ourselves to local reputation only, projects opened themselves up to strong adverse selection, as users willing to go through all the hoops for every campaign are usually the least desirable ones, as they are almost always in it only to loot incentives. Rephrasing a famous “I don’t want to be a member of any club that wants me” adage, we come to “I don’t want a user who agrees to like and retweet 10 announcements a day”.

Due to the proliferation of local reputation campaigns, crypto became more like a roguelike game without any persistent progression across different levels, which is not the most desirable user experience. Users want to see the progression. Users want to see how their onchain experiences make them more interesting and worthy for projects trying to acquire them.

A Vessel

Onchain attention marketplace can’t function without the action element - in the end, incentives exist to make people do stuff onchain. The marketplace is just a vessel to guide people to new products and protocols.

Even with all their pitfalls, crypto “advertising”, which usually means questing-type campaigns, is still better than web2 ads. People receive value for using the product, and a large share of marketing budgets accrues to users instead of middlemen.

However, current user acquisition tooling often goes against the spirit of crypto - recall teams retroactively changing the rules of their points systems or projects saying that “our quests were just for fun and education”.

As much as we want everyone to be in it for the tech, we have to concede that people reading, liking, and retweeting a blogpost every 3 days to get a box checked on a questing platform aren’t doing it for education. We must ditch this notion and move to a more fair and honest marketplace model of “we value your attention at X. Are you taking our incentives offer?”

Attaining the Grail

"And of all the hundred and fifty that went on the Quest, three only are chosen and may set foot on that shore, Bors, Percival, and Galahad. Of these Bors and Percival may see the Grail afar off — three big angels bar their way, and one holds the spear that bleeds”

Onchain Incentives Holy Grail is reaching pure incentive alignment between the user and the protocol - protocol evaluating user’s attention based on their identity and past behaviors, sending an incentive offer, user accepting it, using the protocol, and then converting to a real, paying user also holding protocol’s equity.

Equity share is a powerful tool for creating a win-win situation—imagine a bank's marketing program that would provide newcomers with shares after they deposit money into their savings account.

Of course, not everyone is going to become a real user—just like not every Round Table Knight attained the Holy Grail. Some users will not like the product, and some will not like it enough to use it without incentivization.

We are still in the very early stages when it comes to incentives and incentives pricing. Moving to a marketplace model will increase the efficiency of token distribution and marketing spend - users will understand the true value of their attention, and projects will get a better understanding of their user acquisition economics. There is an ever-increasing demand to connect to relevant audiences as more and more applications move onchain. Frictionless value transaction infrastructure between projects and users is a necessary component of the onchain world.

The vision of the Holy Grail is clear. Will we attain it?

Thank you for reading. We would like to hear your feedback on our vision - talk to us here:

Website - pacts.market

Discord - discord.gg/pacts

Twitter - x.com/pactsmarket