Designing incentives for web3 communities

In all economic contexts, we are driven by incentives. Currently, most of the web3 is built on extrinsic incentives - for example, an NFT, airdrop because you used a product, staking rewards, or a token for your contribution.

We will not be able to build sustainable communities based solely on financial utility, we need something else to drive our motivation - an intrinsic incentive, a sense of achievement, a status. Something that drives our motivations far beyond tokens.

In this article, we are going to explore:

  • How airdrops incentivize us to use a product
  • How to design incentives
  • Different aspects of extrinsic vs Intrinsic incentives within a community
  • Introducing Community Mining: a community-owned token model

Web3 communities structure

There are now hundreds, if not thousands, of DAOs, with more than 1.3M token holders. A majority of the communities have been airdropping between 10-25% of their token supply to users who recently have been participating in the project through certain actions.

Attention is huge when a token is announced but contribution decreases after the token is launched. The key is to convert an adequate number of token holders into contributors. These are the different types of token holders within a community:

  • Holder: either earns the token or purchases it on the market. It is purely speculation. This is great for some projects because liquidity is necessary.
  • Lurker: an observer who may take part in governance or join weekly calls, but takes little to no action.
  • Contributor: worthwhile contributions, working on defined priorities, or leading a project. Adds value to the community.

Extrinsic incentives drive our behavior today, let's look at how intrinsic incentives drive participation in web3 communities.

The airdrop model

Over the course of the past 16 months, we’ve got some airdrops, from $UNI to $SOS, all of them provided financial benefits for their communities, but after a couple of months, when the dust has set - we have to analyze how much these tokens are actually being used.

Is this a drop-and-dump into the market, or are users in fact incentivized to contribute to the protocol? Let’s take a look at the token utility of some of those airdrops in 2021:

  • $RARE: a curation token used to onboard curators, galleries, and collectives. Members can decide on a curated storefront on SuperRare using token-based voting.
  • $GTC: members coordinate to fund public goods, they have voting power over where to allocate resources.
  • $ENS: members were able to vote on the ENS constitution as well as delegate their votes to members that are active in the project’s governance. Holders can vote on govern protocol parameters and control funds from the community treasury.

As a result of the airdrops, users received payments in the five-figure range. Most of the recipients held on to their tokens and participated in governance instead of immediately selling them. Following are the current percentages of supply distributed on exchanges:

Current supply on exchanges
Current supply on exchanges

These tokens were designed within the vision to build and grow their respective network, making users be part of their governance. Wasn’t much financial utility via token reward like staking, but incentivizing users to help build up the network and get to own a piece of it.

In the short-term financial utility does its job to retain users, but we need to build further to ensure sustainable growth of the network and its community. Converting holders into contributors is not an easy task, we must switch from purely extrinsic incentives to an incentive model that includes both: extrinsic incentives to ensure liquidity and intrinsic incentives to ensure sustainability.

Designing incentives

What would we need to consider before designing your community incentives?

  • What is the goal of the incentive? Liquidy, higher engagement in the community, governance.
  • Who do we build the incentive for? Find your target group, define your 'contributor persona'.
  • What kind of incentives should your community receive? Liquid tokens, NFTs, reward points.
  • What's the structure of the incentive, how much supply? Vested periods based on membership tokens, tiered supply allocation.
  • What is enough vs what is deserved? airdrop distribution, incentives for contributors based on tasks/bounties, rewards for liquidity providers.

We need to identify the most common and straightforward actions that members can take on to build up the community. Ideally, these actions are simple and self-explanatory to keep the barrier to start contributing as low as possible. Based on that, create an incentive for each of those actions, such as NFTs, whitelisting for future drops, or reputation system points.

Ownership and perks should be included in incentives. Those perks can go from voting to accessing exclusive features, content, or even events. Status is important in any community.

Example of extrinsic incentive

Some projects define short-term financial incentives, like staking. That’s what $LOOKS, $MAGIC, or even $BADGER did when they launched, huge APR to retain users. You stake your tokens to earn more tokens. But of course, the more people stake, the lower the rewards, so it’s a short-term strategy. $LOOKS went from 1400% to 700% APR in 18 hours. That’s not sustainable. Maybe a solution here is to let users vote with their staked tokens. It’s great to bootstrap your community, but then what?

The staked token could be what drives the economy within your network. A financial utility must be designed to onboard new users and bootstrap liquidity. Communities will create derivatives to open up to new members: BAYC->MAYC->$APE

Example of intrinsic incentive

The intrinsic incentives are what built up some communities today, emerging DAOs to fund good causes like freeRossDAO or the ConstitutionDAO. The token had no financial incentive, no liquidity attached to it, funds were deposited because the participants believed in the cause and came together to make a difference. Actually, $FREE was airdropped later to members that helped build the community:

The number of people funding, creating a community, learning about web3, and spreading the word about this idea kept growing every day. The concept of $PEOPLE wasn't a token, but a community.

Creating status around a token is one way to create intrinsic value. When ENS dropped their token, a trend began, in which you changed your Twitter name to your ENS domain. This trend even reached other social media platforms. What was the effect of this?

Unique addresses having at least one ENS -
Unique addresses having at least one ENS -

It's more than a trend, it's a status game. Those are unique addresses buying their first domain. The FOMO was real, and we continue to see big names entering the space with their ens domain. Thousands of new users bought their first NFT, their personal ENS domain. A clear example of how to onboard and retain new users through an airdrop, where the intrinsic value outweighed the financial one.

Introducing Contributor Mining: a community-owned token model

These DAOs created intrinsic incentives; however, now that the token is out there, we need better solutions for its circulation and building up the network.

Community tokens should rely on contributions. We should design a model where communities start with no token supply. Instead, tokens are minted based on contributions. There’s the famous Internet culture 1/9/90 formula. Today’s tokens are a mix between 9-90, let’s explore if we can build a better model by focusing only on value-adding.

For the model to work, value-add must be calculated and have a fair distribution, reward members accordingly:

  • Make it easier to contribute
  • Reward, but don't overdo it
  • Promote quality contributors

The token design should inspire consistent, value-adding contributions. Contributors should be able to contribute in a manner that fits their circumstances and preferences and feel part of the DAO (values, vision, and objectives).

There are two methods in this essay. You can either start from scratch or do an initial airdrop for everyone who has previously used the platform.

Scratch design - an NFT membership model

The initial NFT is a membership ticket that allows access to their discord, discourse, and any available content. Members receive ownership and governance rights.

Every member starts at the same level, and they receive tokens based on their participation; according to how many calls they attend, how they interact within the community, how many proposals they make, and how many actions/bounties they complete.

The following can be an example of this model ($COM), where users mint tokens based on their contributions to the platform.

COM is the community token and members receive rewards based on contributions
COM is the community token and members receive rewards based on contributions

Within the COM community, tokens are minted for each participation. Seasons in DAOs should focus on expanding that 1% of core contributors.

Airdrop design - vested token model

The airdrop will be initiated by a project, and then the remaining supply will be minted through contributions. Early users will receive airdropped tokens where part of them will be vested upon contribution.

Members get an initial drop and by participating in the community they can unlock the remaining supply. It's a reputation-based model within the community. Since it is a closed economy, it will be difficult for new users to join, but members can advocate for their onboarding and be rewarded with +10% tokens for the value they will add.

Tokens must be earned the same way as the previous model, based on participation. The model won’t just mint tokens and you can still be a lurker. In the same vein, if you cannot make it to three consecutive weekly calls, for example, you may lose token allocation.

Tokens can be deposited on a pool by community members for specific actions. An important aspect is to build a Circulation Economy. If the model only mints tokens every week, there might be a large dominance in the community. Tokens must circulate, members must use the tokens in the platform. There is no sustainable economic design for communities with an unlimited supply of tokens.

The original airdropped vested tokens are deposited in the community pool. If you lose participation, your funds are distributed to the rest of the community. Ultimately, the design’s goal is to have a pool where balance is found and tokens circulate without having to mint x supply of tokens each week.

Final thoughts

Token drops should be more than just capturing people's attention, but also designing the right incentive to keep them. Those with ownership rights will be the ones taking care of your network. Often the largest holders are those who were early in the project, but they aren't necessarily the most valuable to the ecosystem.

Token holders must instead work together to improve incentives, onboard new contributors, and build a closed economy within the community, instead of merely checking where to sell tokens when they receive them. Tokens must circulate and should be in the hands of those who generate value for the community.

For an incentives design playbook, the ecosystem is still too early, but today's communities will evolve token drops and incentives mechanisms to create the framework for the next web3 culture. I’d love to connect if you are exploring this.

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