A Guide to Point Economics: Mastering the New Language of Cryptocurrency Incentives

Written by: Kenton, formerly worked at Maker

Compiled by: Yangz, Techub News

Driven by the innovative points system, a new era of Web3 digital loyalty is coming.

Since Blur launched its groundbreaking points program in 2022, teams have embraced this new incentive mechanism. Every time a new points program is launched, the imagination of incentive design is further expanded, and new reward mechanisms and incentive behaviors are constantly explored. By 2024, the points project ecology has blossomed everywhere, and each project adds a unique color to the evolving points mechanism. The rapid development of the points system provides unprecedented opportunities for user activation and retention. However, it is not easy for new teams to master the intricate "point economics".

Through conversations with teams using points systems and analysis of more than 20 points projects, this guide reveals the strengths, weaknesses, and practical applications of points economics.

Part 1 introduces the basics of integrals, while Part 2 provides a comprehensive overview of integral economics in Web3.

Part 1: Introduction to Points

What are Points?

At their core, points are a digital reward unit valued for their utility or convertibility into tangible benefits (whether that’s exclusive access, product discounts, or outright monetary value). Projects strategically deploy points programs not only to build loyalty, but also to drive product adoption, expand network effects, and shape user behavior in ways that accelerate product growth.

Why are points important?

Points program creates a mutually beneficial relationship between brands and users. Companies gain loyalty, growth, and data, while users are rewarded for long-term use. A well-designed points program can help drive long-term user engagement and deepen emotional connections with users, both of which are the foundation of a product's "moat."

Generally speaking, both Web2 and Web3 companies/projects can benefit from the following benefits from points programs:

• Marketing: When paired with referral programs, points can broaden your marketing funnel.

• Growth: Since points have value, they can reduce the actual price of the product/service, allowing points programs to increase conversion rates within the marketing funnel, thereby achieving growth in core KPIs (such as the number of active users).

• Stickiness/Loyalty: Points programs can increase users’ stickiness to products, thereby increasing user lifetime value (LTV) and reducing user churn. Research shows that loyal users spend 27% more on average, so product stickiness is achieved when the average LTV exceeds the cost of a loyal user.

• Marketing Timing: Dynamic points program helps guide products with network effects, such as social media platforms and financial markets. By rewarding early adopters, companies can improve the user experience of their products long enough to reach market entry standards.

Users can also discover the utility of points programs through:

• Incentive Value: This value can be in the form of discounts, free products, exclusive privileges and benefits, and money.

• Brand Identity: An effective loyalty program can go beyond transactional rewards and allow customers to feel the value and emotional connection of the brand. Loyalty reaches its peak when customers feel a psychological sense of belonging to the brand.

Part 2: “Points Economics” of the Web3 Protocol

Traditional Points Programs

While points programs have been the mainstream incentive mechanism in Web2 for decades, their adoption in Web3 has brought new opportunity. We're familiar with airline loyalty programs (like Delta SkyMiles) and credit card rewards (like Chase Ultimate Rewards) in Web2. These programs successfully drive customer retention/consumption, generating billions of dollars annually. Sometimes loyalty programs bring in more revenue than the company's core business! However, Web3 takes the concept of points to new heights.

Web3 Points Revolution

Blur introduced a points program in 2022, pioneering a Web3 points program. Many projects followed suit, some of impressive scale.

For example, Eigenlayer has a TVL of $18 billion, and if its points program had a capital cost of 10% APR, the program would currently generate points worth $1.8 billion per year. Other notable points projects include Ethena, LRT projects (EtherFi, Swell, Kelp) and Blast.

Unique Advantages of Web3 Projects

In addition to the general advantages, Web3 projects can also get some unique advantages from the points program:

• Early Incentives: Projects can launch points programs much faster than they can launch tokens. Project parties can immediately use points to provide incentives to users, driving project growth from the beginning. In contrast, tokens require careful design, distribution planning, and timing considerations, factors that are difficult to prioritize during a protocol launch. Tokens are also products and should not be rushed.

• Token Conversion Potential: Points can be designed with the possibility of being converted into tokens in the future, thereby increasing their implicit monetary value. This way, the team can effectively “borrow” liquidity from future token generation events (TGE) to fund current incentives.

• Increased flexibility: The points program provides teams with the flexibility to fine-tune their TGE schedules, airdrop allocations, and incentive structures without impeding growth. This flexibility enables the team to develop a more effective go-to-market (GTM) strategy. Additionally, teams are free to adjust points programs compared to incentive programs that require governance approval. While token governance is an ideal endgame, early on, a team’s flexibility can be their competitive advantage.

• Market Timing: Token offerings tend to perform better in bull markets. The points program allows projects to build momentum and community during bear markets, preparing them for a successful token launch when market conditions improve.

It is worth noting that these advantages are not limited to the pre-TGE situation. Projects like Ethena and EtherFi have seen similar benefits with their second-quarter points programs, even after token launches.

Points Plan Design

The points plan in Web3 already includes various complex mechanisms, and many mechanisms are used in combination. The most effective points programs include behavioral rewards, base rewards, and enhancement rewards. In addition, some points programs have experimented with additional utility rewards.

Behavioral Rewards

Behavioral Rewards detail user behavior and actions that can earn point rewards, such as depositing on L2 or trading on new AMMs, specifically including:

• Hold unlocked assets, that is, users can Free deposit and withdrawal assets (such as LRT, Pendle YT, Ethena sUSDe mortgage deposit on Morpho).

• Hold locked assets, i.e. assets that users need to wait for a period of time before withdrawing (e.g. native staking on locked Ehtena USDe, Eigenlayer, Karak and Symbiotic).

• Provide liquidity. Like unlocking assets, but with the risk of passively selling deposited assets (e.g. Thruster LP position collateralized by Hyperlock).

• Social engagement like likes, retweets, comments and follows.

Basic Rewards

Basic rewards include the most important details of the points program, such as the points release plan, schedule and airdrop size in some cases. Most points programs will have multiple points seasons, usually ranging from 3-6 months, each with unique base terms.

1. Point release schedule: the frequency and scale of points holders accumulate points

• One-time reward: one-time point distribution for specific behaviors. Suitable for startup behavior and marketing. For example, Blur offers one-time rewards for listing NFTs within 14 days, Lyra offers one-time rewards for participating in Twitter/X Space events, and Napier offers rewards for social engagement and referrals.

• Continuous rewards

Fixed Supply Release: The total supply of points is released throughout the program (e.g. Hyperliquid) or within a certain season (e.g. Morpho). Although Morpho distributes non-transferable $MOPRHO tokens as rewards, they operate similarly to points issuance. ) is fixed. While both can help reduce dilution for users, a fixed total supply provides the fewest unknowns, while a fixed unit supply allows teams more flexibility in scheduling releases. Teams often release bases using a fixed supply to provide additional guarantees to users.

Variable releases (like Eigenlayer, all major LRTs, Ethena, etc.). The total supply of points varies according to TVL. A variable release schedule dynamically dilutes early participants on a daily basis during participation, in USD or ETH. While perceived airdrop rewards (in USD) will attract new deposits, compensating for user churn will have to increase participation as the total amount of deposits grows. The team prefers this release schedule because it removes the operational complexity of ensuring points are fairly distributed to all participants. To reduce dilution to the earliest users and create a sense of urgency, teams typically announce a decreasing accumulation rate schedule (e.g., 25 points/day in July, 20 points/day in August, etc.).

2. Duration: How long the points will be issued

• Clear vs. vague: Most projects give a fixed points plan/season period (such as 6 months), but some projects give out of range (eg 3-6 months). Teams who want more flexibility will choose vague timelines, but this can also hinder project development.

• Issued based on conditions: Some points plans/seasons are designed to stop the plan if a certain key milestone is reached before the original end date. If the expected season airdrop distribution is fixed, it will increase the urgency for users to participate. For example, Ethena’s first season milestone was $1 billion in TVL, which was reached in seven weeks.

Boost rewards

Boost rewards are the team’s advance adjustment levers that provide users with specific target behaviors a higher relative share of points. Here are several different improvement reward mechanisms:

• Improving service quality: Projects can improve the "service quality" of a certain user group (such as liquidity providers) by motivating the "service quality" of another user group (such as traders) product quality. For systems that can “service” differentiate users, such as the Univ3 pool, projects can allocate points based on users’ contributions to product user experience (such as liquidity). Blur provides greater rewards to LPs who quote prices closer to the NFT floor price, while Merkl’s incentive mechanism favors Univ3 LPs who quote more competitively and earn more transaction fees.

• User recommendation rewards: You can get certain points (such as 10%) by recommending other users. This helps with marketing and acquiring high net worth users. However, since recommenders can recommend their own addresses, there is a risk of a Sybil attack. Some projects will ask users to provide referral codes to obtain more marketing opportunities, but the conversion rate will decrease. Such as Ethena and Blackbird.

• Phased recommendation rewards: an extension of the above recommendation system. Users can not only obtain part of the recommender's first-level points, but also obtain a certain share of the recommender's second-level points. Of course, there is also the risk of a witch attack. Such as Blur and Blast.

• Basic rewards: Projects can set the point accumulation speed to attract and cultivate users. The basic idea is that the user's base point accumulation rate will increase as the base usage increases, thereby earning rewards for the same usage at a faster rate. However, due to the limited capabilities of ordinary users, this mechanism is less attractive to them. Examples of this mechanism include Aevo, which provides traders with a points-based boosting mechanism.

• Market Launch Boost: The project will use launch boost to attract liquidity and guide a new market before the network effect starts. Startup boosts typically have a deadline, but other thresholds can be explored. For example, some LRT projects (such as EtherFi) provide LPs with a two-week startup reward when initializing a new Pendle market.

• Loyalty rewards: Provide extra points to users who are loyal to a certain product (i.e. prove using product A instead of product B). This works especially well for products that rely on network effects; when a competitor's network share shrinks, the product's relative value proposition gets an extra boost. Blur took advantage of this and quickly grabbed market share from OpenSea after the product was launched. Due to the scarcity of NFT, this improvement works better for NFT, especially when each person only owns one NFT of a certain series, which will force them to choose allegiance; but for fungible tokens, users can disperse their assets to any number of addresses to avoid unnecessary stress.

• Random rewards: This mechanism draws inspiration from Skinner’s box experiment. Some projects have added randomness to the reward size or time to attract more user participation and attention. Blur's care package rewards system uses loyalty scores to determine reward "luck" when issuing rewards. Although users do not know the absolute amount of the reward, they know the relative amount between each care package. Similarly, Aevo also uses this mechanism to improve the system. Any transaction of the user may increase the transaction volume, thus amplifying the transaction rewards; both projects use a graded promotion system to obtain the highest transaction volume at the lowest frequency. Reward boost (e.g. 1% chance of getting a 25x bonus boost).

• Leaderboard Rewards: To encourage competition among users, the project will give additional rewards to users with the highest points (such as 100 points). This concentrates points ownership in the hands of top users, but may result in higher absolute KPI values ​​due to competition among users. Blur used this boost mechanic in Season 3, but it wasn't marketed much.

• Native Token Lockup Rewards: Projects with existing native tokens will provide additional rewards for point earners who prove themselves to be long-term believers. Since this may reduce the amount in circulation, teams should expect an increase in the volatility of their tokens. Examples of this include Ethena's ENA and Safe's SAFE.

• Cumulative TVL rewards: The project party can reward points according to the growth of TVL to encourage user promotion and marketing. For example, 3Jane’s AMPL-style points program redistributes point ownership as a function of TVL; Overload promises to increase airdrop allocations when certain TVL milestones are reached.

• Group Rewards: Incentivize social pressure and coordination to gain group-wide reward boosts. AnimeChain pioneered this approach through Squads, a group that shares rewards with others.

• Locked rewards: In addition to basic reward planning that attenuates past sticky behavior, some projects have also begun to try to provide additional rewards for future stickiness. For example, EtherFi’s StakeRank rewards increased by 1-2x in Q2, while Hourglass implemented 1-4x rewards for locking liquidity for different tenors.

Extra Utility Rewards

Finally, additional utility rewards are other direct benefits beyond the airdrop expectations. Anticipation of future airdrops drives much of the demand for points, but some projects are also trying to provide additional utility for point holders, such as Rainbow Wallet's ETH rev share for point holders.

Although this part is still small, I believe that more teams will take inspiration from the Web2 mechanism and try out additional point holder rewards, such as product fee discounts, event access and other benefits.

Combine different reward designs

The versatility of these components makes the points program design creative. Once the team determines the goal (user acquisition, product improvement, marketing, etc.), multiple building blocks can be combined sequentially or in parallel to achieve maximum effectiveness. Here are some examples of creative use cases that are not limited to the ordinary "deposit here" points strategy with the goal of increasing TVL:

• Ethena's strategy is to issue points to USDe holders and increase sUSDe holder yields .

• Napier’s strategy is to incentivize social engagement and other project asset holders to increase collaboration and expand marketing reach.

• Blur’s GTM strategy utilizes various point mechanisms of multiple airdrops to establish supply and demand relationships and quickly gained market share in the NFT track upon public release. By using random care package rewards, the advanced strategy is as follows:

1. User Acquisition: Airdrop 0 Reward Private Alpha Testers to attract the most active NFT traders

2. Launch Supply: Airdrop 1 Reward Existing NFT traders

3. Build supply from loyal users: Airdrop 2 is bigger than Airdrop 1 and has more rewards. Additionally, this phase offers additional rewards to committed traders who move liquidity from other NFT markets to Blur.

4. Stimulate demand: Airdrop 3 reward bidding to stimulate transaction volume

After the project designs the points plan and GTM, it will turn its attention to the implementation of the plan. Points accumulation calculation, data pipeline, price feedback and points data storage are all components of the points program backend. Once the backend is complete, the project will focus on consumer-facing implementations, typically public dashboards that display user point balances and point leaderboards. Many projects are built from scratch, but some outsource this work to development shops and other infrastructure providers.

When the project is ready for TGE and first airdrop, they will explore ways to distribute tokens to point holders. While airdrop mechanics are beyond the scope of this article, teams should consider airdrop tokens versus option forms, fixed allocation versus dynamic allocation, linear versus non-linear allocation, vesting, locking, protection against Sybil attacks, and allocation implementation. Interested readers can refer to this article.

Disadvantages of points

Although the points program is effective, there is no shortage of criticism. The points program is a completely centralized incentive mechanism. Point accumulation calculations, data storage, planning schedules, and criteria are typically opaque and hidden from users, often in an off-chain database. Therefore, projects must prioritize transparency as much as possible in order to build trust among their user base. If users can’t trust the terms of a points program, they won’t value their points and won’t rush to chase rewards.

Before TGE, project parties usually cannot announce upcoming airdrops or distribution to point holders, but they can make efforts in concise communication, timely disclosure of plan adjustments, and quick repairs when errors occur; EtherFi is handling calculation errors It has set an example.

In addition to centralization concerns, other shortcomings, such as stingy point distribution and susceptibility to witch attacks, have been unfairly blamed on the point mechanism. In fact, this is precisely the fault of the airdrop mechanism. Points are just a way to accurately motivate and record how much "point cake" a user has. Instead, it is the airdrop terms that determine the way, time and content of reward points for holders.

As we saw with Eigenlayer, users aren’t unhappy with their points distribution. What they are dissatisfied with is how many airdrops points can be redeemed for and the undisclosed application criteria. If an 11-month deposit earns only 5% of the airdrop, then point holders will naturally feel cheated because this share is far lower than the market average. In addition, many point holders are unexpectedly geo-blocked when claiming their $EIGEN. While the team has complete discretion over token distribution, they can easily avoid this issue in advance by geo-blocking the product. The same is true for Blast, where users aren’t unhappy with their points. Blast airdropped 7% of tokens to point holders and required linear vesting within 6 months for the first 1,000 wallets. For a project less than 6 months old, this is no different than other airdrops like Ethena, EtherFi, etc.

Although this is not a criticism of the project design, it can be seen from public forums and private discussions with DeFi whales that "point fatigue" has become increasingly serious. Understanding the value of points takes time and effort. For each new project, users need to build an initial model and continually update their assumptions to ensure the best return on their capital or actions. As new point programs flood the entire ecosystem, it is difficult for users to keep up with the pace of projects, resulting in fatigue and exhaustion between point programs. For example, suppose you have two options, 1,000 units/day of A points or 2 million units/day of B points. Which is more valuable? Is the more valuable option worth the risk? The answer won't be clear cut. If a project cannot immediately differentiate its points program from all others, its points will have less impact.

The last important and rather hidden drawback of points programs is that they tend to mask product market fit (PMF). Points are a great onboarding mechanism, but have the potential to mask organic interest that helps uncover product-market fit. Even after product-market fit is proven, teams need to build enough organic traction to find product/service sustainability before tightening incentives. Variant's Mason Nystrom calls this the "hot start problem." For pre-PMF teams, I recommend validating the PMF in a closed alpha project before introducing points. Post-PMF teams are trickier, but Mason recommends that teams “take additional steps to ensure token rewards are used organically and drive improvements in important metrics like engagement and retention.”

Future Outlook

Looking ahead, I expect points programs to continue to evolve to address the most pressing issues, such as program transparency and points fatigue.

To improve the transparency of points supply, allocation logic and accrual history, future points plans or parts of points plans will be implemented on-chain. Examples of this include 3Jane’s AMPLOL and Frax’s FXLT points. Stack, another points software provider, has also built an infrastructure to manage on-chain points programs.

Compared with the transparency issue, solving points fatigue is a more complex challenge. While discussions in private chat and CT tend to focus on differentiation in program design, the key to reducing fatigue may lie in giving users the ability to quickly and confidently assess points valuations. This ability will greatly simplify comparisons between various points opportunities, making participation in decision-making more straightforward and less overwhelming. Although the secondary market (such as the whale market) is not part of the points program design, it can help users price points and reduce fatigue, although it is not liquid enough to support most points exit strategies. As these markets mature, they are likely to become invaluable for price discovery, providing exit strategies, and creating a more dynamic points economy.

Summary

In the Web3 ecosystem, points have become a powerful tool, with advantages beyond traditional loyalty programs. Points enable projects to reward loyal and powerful users, bootstrap network effects, and adjust market strategies in a more predictable way. This will lead to more efficient product development, ultimately delivering value to end users.

As the field matures, I expect there will be further innovation in the design and implementation of points programs. The key to success is balancing transparency with flexibility and aligning the points program closely with overall project goals and user needs.

For builders and projects in the Web3 space, understanding and leveraging a well-designed points program is a key factor in achieving sustainable growth. As we move forward, points will likely continue to be a fundamental part of cryptocurrency incentive structures, continuing to shape the landscape of DeFi and beyond.

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