Bootstrapping Web3 Networks: The Limitations of Token Incentives

Web 3 introduces a powerful new tool for bootstrapping networks: token incentives.The basic idea is: early on during the bootstrapping phase when network effects haven’t kicked in, provide users with financial utility via token rewards to make up for the lack of native utility.

Web3 changes the whole approach to bootstrapping new networks, since tokens offer an alternative to the traditional approach to the cold-start problem. Rather than spending funds on traditional marketing to entice and acquire potential customers, core developer teams can use tokens to bring in early users, who can then be rewarded for their early c... See more

Incentive DesignTokenomics are a tool for aligning the incentives of participants in a network. It is extremely important to identify what behavior is required from each participant in an ecosystem in order for the network to achieve a virtuous cycle. Equally important is designing suitable token incentives that encourage the desired market behavio... See more

Early versions of token distributions have led to unsustainable dynamics wherein speculators are rewarded instead of those who are adding consistent value to networks through actual usage.

1. User ownership can jumpstart growth, but sustaining it is more challenging Giving users ownership in the form of tokens can be a powerful alternative to paid marketing, helping to bootstrap networks and overcome the cold-start problem.

Tokens can be useful in capturing user attention and bootstrapping initial adoption, but they need to be coupled with strong product-market fit—solving a widespread need for users—in order to sustain usage.