Why do we do - what we do? That’s an interesting place to start when discussing incentive design, human motivators, behaviours and what drives humans to act a certain way when an incentive is introduced in the system.

Building a community, incentivising users and creating successful loyalty programs to engage, interact and involve the consumer beyond the capacity of a user or a customer - has been an ever-evolving, ongoing quest for web3 projects / organisations.

But in the recent times, we have seen an emergence of innovative and unique incentive design mechanisms utilising the principles of game theory and operant conditioning in the space. Crypto projects have realised the power of token incentives to build loyal communities of contributors with aligned interests and skin-in-the-game incentives.

What are Token Incentives

Token incentives refer to the use of digital tokens, such as cryptocurrencies, to incentivize certain behaviours or actions within a decentralized system or community.

How do they work?

Tokens are greatly effective when it comes to aligning cumulative interest, distributing skin-in-the-game incentives & the appropriate assignment of ownership & power among the stakeholders of the project based on how many tokens they hold (i.e. how much skin in the game they have).

Therefore, token incentives work beautifully as they open the system for mass participation & contribution - giving the users, the supporters and the community members of the project a voice in the decision-making processes.

Call it what you will, incentives are what get people to work harder. — Nikita Khrushchev

The Challenge

But, as a project in its early stages of development and growth, the biggest challenge is finding ways to appropriately incentivise the community & get much needed & deserved traction for its product!

1. Some projects launch their NFT collections as membership NFTs or pfp NFT collections with the intention to create a sense of belonging or at times urgency, playing on the feeling of FOMO (fear of missing out). With the goal to drive the community to use their product or participate in online events in order to earn these NFTs.

2. On the other hand, a lot of projects adopt the strategy of liquid rewards, giving away stables like USDT, USDC or cryptos like BTC or ETH in order to incentivise the early community to perform certain actions or complete a set of tasks.

In both the above scenarios the core utility of the project & the offering of the product gets diluted down by mis-aligned incentives, as these incentives do not feed into the system but rather distract the users from the inherent vision of the project.

Bottomline, the community members end up becoming passive users hopping from one liquid reward to the next, or end up becoming obsessed with pretty jpegs which in the larger scheme of things bring no value to the product or the project itself.

Earn IOU Tokens

IOU tokens serve as preliminary tokens or pre-launch tokens for projects planning to launch their own token in the near future. These tokens can be created and distributed to the dedicated community members as an acknowledgment and incentive for their valuable contributions, time, and energy invested in the project's success. IOU tokens are redeemable for the actual token, post the actual token launch.

Skin in the Game Incentives

‘Skin in the game’ incentives bring the individual’s personal stake in the outcome of a decision or activity. The idea is that when people have "skin in the game," they are more likely to make decisions that are in the best interest of the community because they are directly impacted by the outcome. Therefore, skin-in-the-game incentives align the interests of the community, increasing accountability and transparency, and creating a culture of shared responsibility.

IOU Tokens vs Liquid Rewards

In terms of community incentives, a prevalent and widely accepted approach involves distributing liquid rewards, such as BTC, ETH, or stablecoins like USDT, USDC, and DAI, which can be traded and converted.

While this method might yield short-term results, it’s unsustainable and fails to foster long-term loyalty to the platform or product. Such incentivization allows individuals to readily utilize their rewards but does not instill a sense of alignment and commitment towards the project's vision, as the project would expect.

Conversely, 'IOU tokens' as pre-launch tokens cannot be traded or exchanged. They hold a potential unrealized value, fostering a sense of anticipation and excitement within the community as members accumulate and hold more of these tokens. Since the value of IOU tokens is directly proportional to the success of the community, it creates a fundamental level of alignment and commitment among individuals as they are rewarded with something that is tied to the success of the community, and their rewards increase as the community grows.

TLDR; IOU tokens serve as skin-the-game incentives that aligns individual’s interests with the community's success, fostering a sense of alignment & commitment. On the other hand, liquid rewards are more readily accessible and, therefore, do not generate the same level of alignment.

Properties of IOU tokens

• On-chain Tokens: Instead of just being XP points, IOU tokens are created and issued on-chain, and therefore can be tracked, monitored and viewed as balances in user wallets.

• Earned Rewards: IOU tokens can’t be bought but can only be earned or won by participating or contributing in on-chain or off-chain quests.

• Non-transferrable: IOU tokens can’t be transferred out of the wallet to different user wallets, therefore preventing trades and price discovery before the project token launch.

• Non-tradable: IOU tokens cannot be traded / exchanged / bought or sold. Therefore cannot have a secondary market. Their value is directly proportional to the actual token.

• Redeemable: Each IOU token is 1:1 redeemable for the project token.

• Customisable: The project creating its IOU tokens has full control over the supply, issuance and distribution of its project IOU tokens.

• Whitelisting dApp Smart Contracts: Capx team helps projects whitelist certain dApps (i.e. smart contracts) to allow limited use of their IOU tokens with the whitelisted smart contract. This opens the doors for the project to experiment with on-chain governance models or testing the token utility within their product ecosystem as an incentive.

In conclusion, IOU tokens present a groundbreaking innovation in token incentives, offering unique advantages over traditional reward mechanisms. By fostering a sense of shared responsibility and accountability, they have the potential to revolutionize community building and project development.

We've only just scratched the surface of IOU tokens, the applications and possibilities are endless. We will dive deeper into the various use cases and applications of IOU tokens, exploring how they can be effectively leveraged to enhance engagement and collaboration within communities and projects alike - in the upcoming blogs.

Are you a Project?

If you're a project team interested in harnessing the power of IOU tokens for your own venture, we invite you to register and explore the possibilities of creating and using IOU tokens. You can start by applying for your very own community space on Capx App & let someone from our team get in touch - https://capx.typeform.com/to/eJpOh5cx

About Capx App:

Capx App is a gamified social learn-to-earn, community discovery platform. Supercharged with IOU tokens & innovative token distribution strategies, it enables projects to bootstrap community growth and achieve their product goals more effectively.

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