A Journey into Progressive Ownership of Application Tokens

Table of Contents

While tokens have successfully kickstarted infrastructure networks like Bitcoin and Ethereum, applying the same model to the application layer has proven challenging. This article explores the hurdles faced by existing token models, the evolution of token distribution, and introduces a promising solution – the Progressive Ownership Model.

(This article is based on the model proposed by the Varian Foundation)

I. Challenges in Existing Token Models

Navigating the Token Conundrum: Impacts on Growth and Retention

The widespread adoption of tokens in the cryptocurrency space has not been without its share of challenges, particularly when applied to applications. While tokens have successfully fueled the growth of infrastructure networks like Bitcoin and Ethereum, the application layer has faced a unique set of hurdles that have hindered sustained growth and user retention.

Issues with Token Models for Applications

The primary challenge arises from the fact that traditional token distribution models have struggled to strike a balance between attracting genuine users and fending off speculative interests. In many instances, the distribution of tokens has attracted a swarm of speculators and mercenaries rather than fostering a user base genuinely interested in the product or service offered. This influx often muddles the understanding of product-market fit, leading to a distorted representation of a project's true value.

Another key issue lies in the potential obfuscation of product-market fit. The distribution of tokens, instead of encouraging organic growth, has sometimes acted as a distraction, diverting attention from the fundamental question of whether a product genuinely addresses market needs. This misalignment has hindered the development of applications that could otherwise thrive with a more targeted and user-focused approach.

Impact on Growth and Retention

The consequence of these challenges is a potential impediment to sustained growth and user retention. As applications grapple with the influx of speculators and mercenaries, the core user base – those who find real value in the product – can be overshadowed. This imbalance can lead to a lack of meaningful engagement, inhibiting the development of a loyal user community that is crucial for the long-term success of any application.

Moreover, the focus on token distribution as a growth strategy has, at times, taken precedence over achieving a solid product-market fit. In the rush to distribute tokens widely, some projects have neglected the foundational work of building a product that resonates with users. The result is often a disconnect between token distribution efforts and the actual value proposition of the application.

II. Evolution of Token Distribution Models

Lessons from Proof of Work to Airdrops

The landscape of token distribution has undergone a fascinating evolution, marked by distinct eras that have shaped the trajectory of the cryptocurrency space. Understanding the lessons from each era is crucial for crafting a model that aligns with the changing needs of the industry and addresses the challenges faced by contemporary applications.

Proof of Work (2009–present)

The Proof of Work (PoW) era, inaugurated by Bitcoin, revolutionized the concept of a permissionless network. Users could participate by running software on their machines, mining tokens, and earning ownership in the network. This era highlighted the effectiveness of token incentives in bootstrapping supply, especially in networks where contributed value could be quantified, such as computing power. However, the PoW model also introduced challenges. As specialized hardware became a prerequisite, it inadvertently edged out ordinary users, making entry more challenging for those without substantial investment in computing resources.

ICOs (2014–2018)

The ICO era marked a departure from PoW by allowing projects to raise capital and distribute tokens directly to users. While this approach aimed to democratize funding and bypass traditional intermediaries, it faced significant issues. The promise of quick capital attracted not only genuine entrepreneurs but also opportunistic actors. The ICO landscape became rife with fraud, theft, and a lack of accountability. Despite the challenges, ICOs underscored the potential for blockchain in global capital formation, emphasizing the need for thoughtful token design and community alignment.

Airdrops (2020–2023)

Airdrops emerged as a response to the need for decentralization. By distributing tokens broadly to users based on historical usage, projects sought to achieve a sufficient level of decentralization. This era witnessed the rise of "DeFi Summer" in 2020, fueled by liquidity mining and yield farming. However, the airdrop model had its pitfalls. Users, without significant skin in the game, often converted their tokens to income, attracting short-term, mercenary users rather than fostering a committed user base aligned with the project's long-term success. Rushing token distribution before achieving product-market fit proved to be a mismatch between growth strategy and organizational execution for many projects.

Each era brought valuable insights and lessons, paving the way for the emergence of the Progressive Ownership Model, a forward-looking approach that builds upon these lessons to create a more sustainable and user-centric token distribution framework.

Source: variant

III. Progressive Ownership Model

A New Paradigm: Building, Sharing, and Leveling Up

As we navigate through the challenges of existing token models and glean lessons from the evolution of distribution strategies, the Progressive Ownership Model emerges as a beacon of innovation and user-centricity. This section outlines how this novel approach builds on the concept of progressive decentralization and introduces a three-step process that transforms users into active stakeholders.

Building on Progressive Decentralization

Progressive Ownership is not just a departure from previous models; it's an evolution built on the concept of progressive decentralization. The model recognizes that tokens alone are not a substitute for achieving product-market fit. Instead, it advocates for a phased approach where economic incentives gradually increase user loyalty and retention, culminating in ownership. By aligning users with the success of a network in stages, Progressive Ownership aims to avoid the pitfalls of previous models and foster a more sustainable growth trajectory.

Three Steps: Building, Revenue Sharing, Leveling Up

1. Building Products that Serve Users' Needs:

- The foundational step revolves around creating products and services that genuinely meet users' needs. Success lies in offering a step-function improvement, addressing core user requirements, and cultivating psychological ownership. This step emphasizes the crucial interplay between product development and user satisfaction.

2. Onchain Revenue Sharing for Growth, Retention, and Defensibility:

- Progressive Ownership introduces on-chain revenue sharing as a mechanism to deepen user interest and commitment. Projects can leverage revenue-sharing models, akin to Zora's protocol rewards, which allocate a portion of earnings to creators and developers. This not only encourages user retention but also strengthens the defensibility of the network.

3. Allowing Power Users to Level Up into Ownership:

- The final step is a transformative one, where the most loyal and engaged users are given the option to level up into economic ownership. Users can choose to trade their individual income (e.g., ETH or stablecoins) for tokens representing a proportional share of the community's revenue. This transition is not automatic; rather, users actively opt into ownership, ensuring that only the most committed users become stakeholders.

Progressive Ownership, by design, shifts the token distribution model from an opt-out to an opt-in structure. This shift holds the potential to create stronger loyalty and network effects, as users with "skin in the game" become economically aligned with the success of the network. The approach emphasizes commitment, incentivizing users to encourage others to join, creating a virtuous growth loop that is driven by genuine user engagement rather than short-term incentives.

In the following section, we will explore the implementation details of Progressive Ownership, addressing challenges and considerations while drawing parallels with loyalty models from traditional web environments.

IV. Implementation and Future Outlook

Charting the Course: Challenges, Precedents, and Future Frontiers

Having explored the foundational principles of the Progressive Ownership Model, we now shift our focus to the practicalities of implementation and consider the broader landscape of loyalty models. This section delves into the challenges and considerations associated with bringing Progressive Ownership to fruition, drawing inspiration from traditional web2 loyalty models and envisioning the potential future iterations of this groundbreaking approach.

Challenges and Considerations

Implementing a paradigm shift in token distribution comes with its own set of challenges. As projects explore the Progressive Ownership Model, questions arise around the mechanics of implementation. Should users be required to stake their tokens to earn platform fees? What vesting periods should be in place for tokens? These nuanced considerations are critical in shaping the user experience and ensuring that the model aligns with the long-term goals of the project.

One practical challenge lies in striking the right balance between incentivizing user commitment and avoiding unnecessary barriers to participation. The opt-in nature of Progressive Ownership is a deliberate choice, allowing users the flexibility to choose between income and ownership. However, finding the optimal ratio and structure that encourages meaningful user participation while maintaining the project's economic viability requires thoughtful experimentation and iteration.

Precedents in Web2 Loyalty Models

The Progressive Ownership Model resonates with traditional loyalty models in web2 environments. Drawing inspiration from James Heskett's ladder of customer loyalty, Progressive Ownership aims to cultivate ever-deepening levels of psychological ownership among users. As users ascend the ladder from income to tokens, they might feel an increasing degree of ownership, ultimately becoming vocal advocates for the product.

Leveraging economic ownership to entrench user loyalty aligns with research from the public equities world, where stock ownership has been shown to boost brand loyalty. By allowing users to actively choose ownership, projects employing the Progressive Ownership Model can nurture an emotional connection with their user base, fostering long-term stakeholders who are more inclined to contribute to the platform's success.

Transitioning to a New Token Distribution Era

The Progressive Ownership Model represents a significant departure from previous eras of token distribution. Unlike ICOs and airdrops, which primarily served as bootstrapping tools, Progressive Ownership emphasizes a user-centric, community-driven approach to ownership distribution. By prioritizing revenue-sharing and gradual user involvement, it ensures that only the most committed users become stakeholders.

As we transition to this new era of token distribution, the article recognizes the need for novel compliance arguments that enable teams to continue building innovative products while empowering users through ownership. Addressing these compliance challenges and establishing a robust framework for Progressive Ownership is an area of ongoing exploration for projects like Variant.

Future Iterations and Challenges

The evolution of token distribution is an ongoing process, and the Progressive Ownership Model is a significant contribution to this narrative. The article concludes by acknowledging that the playbook is still being written, and the industry eagerly anticipates future iterations on token distributions. As innovation continues to catalyze growth and development in the crypto ecosystem, the Progressive Ownership Model stands as a testament to the industry's commitment to user-centric approaches and sustainable, community-driven growth.

Conclusion

In conclusion, the Progressive Ownership Model offers a promising path for applications seeking sustainable growth and genuine user engagement. By addressing the shortcomings of previous token models and leveraging a user-centric approach, we pave the way for a future where users are not just participants but owners in the digital landscape. As the industry continues to innovate, the article concludes with an invitation to explore creative ways to shape the future of token distributions.

About Orochi Network

Orochi Network is a cutting-edge zkOS (An operating system based on zero-knowledge proof) designed to tackle the challenges of computation limitation, data correctness, and data availability in the Web3 industry. With the well-rounded solutions for Web3 Applications, Orochi Network omits the current performance-related barriers and makes ways for more comprehensive dApps hence, becoming the backbone of Web3's infrastructure landscape.