What are allocations and vesting in tokenomics, and why are they important?

Web3 oligarchs are exploiting users: From Tokenomics to PointomicsKey Points

1. Replacing Tokens with centralized Loyalty Points as the core incentive system is not a necessary and sufficient condition for the success of Web3 projects, but rather a choice made by project teams out of necessity during bear markets.
2. The intrinsic value of Loyalty Points is the credit of the project team, hence the higher cost of trust, making it more suitable for monopolistic projects.
3. Web3 oligarchs rape users through Loyalty Points to gain initiative but abandon Network Effects.
4. It is crucial and unstoppable to endow Web3 project Loyalty Points with liquidity.

Introduction

We have just experienced one of the fastest crypto cycles in history, transitioning from a bear to an extreme bull market in less than two quarters. The price of BTC rapidly rose from under $30,000 to an all-time high. This surge was primarily driven by the approval of a large number of BTC ETFs against the backdrop of the Fed’s tightening cycle nearing its end, injecting a significant amount of new capital into the market. During this speculative period, the Web3 world also underwent quiet changes. On one hand, new narratives emerged, from Ordinals to BTC Layer2, to Restaking, each creating new wealth myths. On the other hand, the typical genes of Web3 projects are quietly changing, which is the topic we hope to delve into today: the mysterious flywheel that Web3 projects take pride in seems to be undergoing a shift from Tokenomics to Pointomics. From my perspective, this doesn’t seem so wonderful!

First, let’s explain the topic. Tokenomics refers to the combination of “Token” and “Economics”, that is, issuing a blockchain-based Token as the core subject and building an economic model around it. Typically, the core purpose of this economic model includes the following three objectives:

1. To promote project growth by incentivizing user behaviors that are beneficial to the project’s development with certain Token rewards.

2. To solve the financing needs of the project team through the design of Token issuance ratios.

3. To grant certain governance rights to Tokens, achieving a relatively decentralized co-governance mechanism between users and the project.

The success or failure of most Web3 projects usually hinges on whether the first core objective can be achieved. A well-designed Tokenomics can usually maintain a relatively long-term, stable effect on incentivizing core project behaviors, with low maintenance costs for the project team. For the best among them, we usually believe they have a flywheel with positive feedback capabilities, continuously drawing energy for development and achieving a cold start for the project.

Pointomics, a term I coined, is defined as an economic model with Loyalty Points as the core incentive subject, emphasizing incentives for key user behaviors to promote protocol growth. Its design paradigm is similar to the user incentive part of Tokenomics, but the subject of the incentive mechanism is changed from a blockchain-based Token to a digital Point number (commonly known as Loyalty Point) that exists on the project team’s centralized server.

Recently, it’s not hard to notice that most of the star Web3 projects have chosen Pointomics over Tokenomics at the start of their projects, and these projects usually perform well. We can easily select some representative project data to illustrate this trend, taking our hottest Ethereum Layer2 projects Blast, and the Restaking track’s EigenLayer and EtherFi as examples. They all chose Loyalty Points as their core flywheel, and the total amount and growth rate of their TVL far exceed other projects that started with Tokenomics.

Blast Historical TVL in DefilamaEigenLayer Historical TVL in DefilamaEtherFi Historical TVL in Defilama

So, can we say that the new flywheel of Web3 has shifted from Tokenomics to Pointomics? I believe it’s too early to make this judgment.

Pointomics originates from the Forced Choice of Project Teams During Bear Markets

Firstly, it should be pointed out that I believe replacing Tokens with centralized Loyalty Points as the core incentive system, or so-called Pointomics, is not a necessary and sufficient condition for the success of Web3 projects. It originates from the forced choice of project teams during bear markets.

Let’s examine the differences between Pointomics and Tokenomics. Although both aim to achieve the same goal, there are significant differences in reality. The differences lie in:

1. Vague Equity: Unlike Tokenomics, project teams that use Loyalty Points as their core flywheel usually do not make precise value commitments but choose some vague soft promises, such as potential airdrops or certain boosting effects. This is uncommon in projects that choose Tokenomics as their core flywheel because the reward subject is publicly traded from the start. Once the value is priced by the market through trading, its speculative profit is quantified, providing a reference value for user participation.

2. Opaque Incentive Mechanism: A considerable number of project teams do not provide precise explanations for the Loyalty Point incentive mechanism. Since Loyalty Points exist on centralized servers, the incentive mechanism is a black box to users. Users can only see a number without knowing the reasons and calculations behind it, making it difficult to investigate whether it is fair and accurate. In Tokenomics, the incentive mechanism is implemented through smart contracts, ensuring that users have self-checking capabilities and guaranteeing the openness and transparency of the entire reward process.

3. Non-Tradable Profits: When users obtain Loyalty Points, they are usually not tradable. To realize profits, they can only wait for the project team to actively fulfill their soft promises, but this process is often lengthy and full of uncertainties. In Tokenomics, user rewards are issued in the form of Tokens, giving users the ability to vote with their feet, allowing them to realize their profits directly through trading. This, in turn, places certain demands on the project team to optimize the project to retain users.

This doesn’t look good, so why is there such development? I believe it stems from the forced choice of project teams to reduce operational costs during bear markets. Looking back a year ago, Blur and Friend.tech were the phenomenal projects of the time. Blur was a decentralized exchange, and Friend.tech is a decentralized social media platform. Unlike most projects at the time, both chose to use centralized points as the subject to incentivize users to use their products, achieving good results. I believe they essentially shaped the current basic paradigm of Pointomics.

The reasons for their success are partly due to the success of project operations and design, and I believe mainly because the crypto market was still in the late stage of a bear market at that time. Market liquidity and user buying willingness were relatively low. Hastily choosing to distribute Tokens as incentives would face significant market pressure, and the cost of maintaining the profitability of project incentives would be relatively high. Choosing Pointomics effectively reduced this cost because, during the cold start phase, the project team had no pressure to manage market value, and profits needed to be realized only after a successful start.

This reduced the project team’s operational costs in the early stages to some extent, but at the expense of damaging user profits and somewhat dampening user participation willingness. When the market quickly entered a new bull market cycle, users’willingness to participate in projects and purchase Tokens recovered. At this time, due to market inertia, users had a certain tolerance for Pointomics, which also made its recent performance seem good on the surface. However, treating Pointomics as a necessary and sufficient condition for the success of Web3 projects and adopting it blindly seems somewhat crude. When the market is filled with a large number of unredeemed, hidden centralized Points, exhausted users will bite back at the crypto world.

The Intrinsic Value of Loyalty Points is the Credit of the Project Team

Next, we need to discuss what is the key to a successful Pointomics design, or what is the intrinsic value of Loyalty Points. I believe the answer is the credit of the project team. According to the above sharing, we know that projects that choose Pointomics usually do not assign a clear right to their Loyalty Points but only use some vague descriptions to get by. This certainly brings more initiative to the project team, allowing them to dynamically adjust the final equity conversion method based on the project’s operation status, thus maintaining a more appropriate relationship between cost and effect.

In this case, the motivation for users to remain enthusiastic about the illusory Loyalty Points lies in the trust that the project team will allocate appropriate rewards for Points in the future, and the strength of this trust determines whether the project’s Pointomics has successfully stimulated user participation enthusiasm. However, this is usually strongly related to the project’s background. A team that has received luxurious VC investment, strong ecosystem support, or has a strong background will have a stronger sense of trust compared to those degen, community-driven projects, which are usually hard to have at the start of the project. This explains why projects that choose Pointomics and succeed are usually some large Web3 oligarchs. You can easily find such examples, especially in the Restaking track.

Therefore, I believe that compared to using Tokens directly as the incentive subject, choosing Pointomics has a higher trust cost and is more suitable for monopolistic projects. However, this also provides these oligarchs with more convenient tools and conditions to exploit users using their scale advantage.

Web3 Oligarchs Exploit Users Through Loyalty Points in Exchange for Initiative, but Abandon Network Effects

So, how does this exploitation of Web3 users manifest itself? Mainly in the following three aspects:

1. High Time Cost: Since Web3 oligarchs cunningly delay the actual rewards to an unknown future, and for most Web3 projects, TVL is an important indicator, so incentivizing capital participation is a common method. For users, they need to participate in the project in some way with their assets to earn potential profits, which raises their time cost. Because before the oligarchs actually publicly commit to realizing profits, you will have to continue to expect them, and the increasingly high time cost makes it harder for users to quit.

2. Opportunity Cost: The importance of liquid funds during a bull market phase is well-known, as the market never lacks hotspots, making it relatively easy to capture Alpha returns. However, funds locked to obtain potential profits impose significant opportunity costs on users. Imagine you could have used your 10 ETH to participate in Project A and instantly receive a 15% APY. Instead, you chose to participate in Project B to earn Points and hope for potential returns, only to discover when the returns are announced in the future that they are merely 1%. Such a tragedy recently unfolded in the community of another star project, EtherFi.

3. High Risk, Low Potential Returns: Projects are often fragile at their inception, especially in the Web3 domain. We have seen too many star projects achieve high TVL in a short period, only to lose funds due to smart contract vulnerabilities or operational errors, with early participants ultimately paying the price. Thus, these users usually face higher risks than participating in a mature project. However, due to the initiative Pointomics brings to project teams, they can easily abandon their early participants once the project is successfully launched and running smoothly, as they have lost value and become a burden. Conversely, if the project fails to launch successfully, the project may choose to minimize actual returns to save costs. Therefore, this process is a high-risk and low-potential-return gamble for users.

Is this exploitation perfect for the project? The answer is also no. Because in this process, the project neglects Network Effects. We know that the core values of the Web3 era are decentralization, co-governance, and openness. By switching from a closed database to an open and transparent blockchain platform and using a fair incentive mechanism (usually Tokens), the power of the community is fully leveraged to build together, creating many miracles. The key here is the Network Effect. However, choosing centralized Loyalty Points will close off the entire incentive system, which is a regression and an oversight of the Network Effect. I assert that projects using Pointomics, if unable to successfully transition to Tokenomics or satisfy users in the process, will not have a vibrant community or a hopeful ecosystem, which is a greater loss.

Granting Liquidity to Loyalty Points for Web3 Projects is Crucial and Unstoppable

So, hasn’t there been a change? I believe the crypto community has noticed this phenomenon and taken action. The reason lies in the centralized nature of Loyalty Points, which strips them of liquidity and transparency, leading to user passivity. Therefore, it is interesting to grant liquidity to Loyalty Points in some way. Unlike most Web2 projects’Loyalty Point Plans, since most key user behaviors in Web3 projects are on-chain and these data are open and transparent, it is possible to tokenize off-chain Points through some on-chain proxy, which is difficult to achieve in the Web2 world.

We have seen some interesting projects attempting to solve this problem, such as WhaleMarkets, Michi Protocol, and Depoint SubDAO. In WhaleMarkets’Point Market, we have seen many transactions around Point earnings accounts, and Michi Protocol even won an award at the ETH Denver hackathon, indicating that the pain point is valid and has significant market potential. In summary, these projects generally fall into two core ideas:

1. By creating an on-chain proxy or wallet and NFTizing this on-chain proxy wallet, the rights to all earnings of the account are encapsulated on-chain. By purchasing the ownership of a certain on-chain proxy, users can obtain all future rights of that account, while sellers can discount their future earnings in advance, locking in profits, thereby reducing their time and opportunity costs. Examples include WhaleMarkets and Michi Protocol. However, this approach has limitations, as the liquidity of NFTs as carriers is poor, preventing the formation of an effective secondary market. Moreover, there are no successful cases of financial innovation around NFTs, so the potential for Network Effects is relatively low.

WhalesMarket Operation interfaceMichi Protocol Operation interface

2. Similar to the first idea, but by directly tokenizing off-chain Loyalty Points, issuing corresponding on-chain ERC-20 Tokens to map the quantity of Loyalty Points, and designing mechanisms to bind the value of Tokens to the value of Loyalty Points, users obtaining Tokens is equivalent to gaining the ability to realize future earnings of the corresponding Points. An example is Depoint SubDAO. Compared to the first idea, this approach provides better liquidity for the secondary market and stronger potential for financial innovation. However, resolving the value mapping relationship between Loyalty Points and Tokens is crucial. Because most key user behaviors incentivized by Pointomics in Web3 projects are on-chain, many off-chain operations, such as following X or joining a community, all of which pose certain challenges to the coverage of value mapping.

Depoint SubDAO Operation Interface

In conclusion, I believe it’s time for Web3 Degens to pay attention to this exploitation. Through relentless efforts, we have reclaimed ownership of the network, avoiding the ruthless monitoring and exploitation of Web2 oligarchs. Let’s not lose the fundamentals that Web3 prides itself on.

Web3 oligarchs are exploiting users: From Tokenomics to Pointomics was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.