Variant Founder: The Evolving Token Distribution Mechanism and the Future of Gradual Ownership

Original Title: “Progressive Ownership: A Model for Application Tokens”

Authors: Li Jin & Jesse Walden, Founding Partners at Variant

Compiled by: Biscuit, ChainCatcher

The core idea of Variant is that the next generation of the internet will transform users into owners through tokenization. Using tokens as user incentives has proven very effective in guiding infrastructure networks like Bitcoin and Ethereum. However, the application layer has yet to see a validated model for developing networks using tokens. Instead, there are many examples showing that distributing tokens tends to attract more speculators and airdrop hunters rather than genuine users, thus hindering the sustainable growth of the ecosystem and confusing product-market fit.

Lessons from failures tell us that many view the use of tokens in applications as a category error, but we do not share this view. Instead, we believe it is necessary to gradually achieve a bottom-up, self-selective ownership distribution model through continuous iteration of token design, which we call "progressive ownership." This approach emphasizes deepening user loyalty through product-market fit.

Within this framework, we outline the token distribution mechanisms of the previous eras—PoW mining, ICOs, and airdrops—and their key lessons and issues. We then propose high-level steps and strategies for a new token distribution model that we believe can sustainably develop applications through early product-market fit. Through progressive ownership, applications can deepen user loyalty and pave the way for further growth and retention.

Three Eras of Token Distribution

The token distribution models in cryptocurrency have gone through three main eras:

• Proof of Work (PoW) (2009 to present): Hardware Mining
• ICO (2014-2018): Capital Effects
• Airdrops (2020-2023): Incentivizing Usage

Each model has lowered the barriers to user participation while expanding the user base, leading to new waves of growth and development in each era.

1. The Proof of Work Era (2009 to present)

Bitcoin pioneered the idea that anyone willing to run software on their machine ("mining") could operate a permissionless network in exchange for tokens representing ownership of the network. Miners who invested more computational power had a greater chance of receiving rewards, thus promoting specialization that required meaningful investment in computational resources.

The PoW era demonstrated that token incentives are very effective in guiding network supply, where the value of contributions can be quantified, such as computational power. Importantly, capital assets (hardware) differ from financial assets (BTC), the latter forcing miners to sell financial assets to cover costs. As specialized hardware became a necessary cost, professional miners had more at stake, but this dynamic also squeezed out ordinary users.

2. The ICO Era (2014-2018)

The ICO (Initial Coin Offering) era marked a significant departure from the proof-of-work distribution model: projects raised funds and distributed tokens by directly selling them to potential users. In theory, this approach allowed projects to bypass intermediaries like venture capitalists and bankers, reaching a broader range of participants who could share the benefits of their products and services in advance.

The prospects of this model attracted entrepreneurs and investors, sparking a wave of speculative interest. In 2014, Ethereum launched via an ICO, providing a blueprint for many projects in the following years, including large ICOs like EOS and Bancor in 2017-2018. However, the ICO era was rife with fraud, theft, and a lack of accountability. The failures of many ICO projects, combined with stringent regulatory scrutiny, led to its rapid decline.

The ICO highlighted the blockchain's ability to facilitate permissionless global capital formation. However, this period also underscored the need for more refined token design and distribution models that prioritize community coordination and long-term development, rather than just capital supply.

3. The Airdrop Era (2020-2023)

Unlike ICOs, which distribute tokens for monetary investment, airdrops reward users based on their historical usage. In 2020, this model heralded the "DeFi Summer," popularizing liquidity mining (providing liquidity in financial markets to earn tokens) and yield farming (selling earned tokens for short-term gains).

While airdrops represent a shift towards a more user-centric and community-driven ownership distribution model, users are often not required to engage, and most users sell the airdropped tokens after receiving them, converting ownership into income.

Many projects utilized airdrops before establishing product-market fit. Tokens attracted professional airdrop hunters and profit-driven users, who were entirely motivated by self-interest, and network ownership did not genuinely transfer to those who aligned with the project long-term. The frenzy of buying and selling tokens muddled the signals of product-market fit and led to boom/bust cycles in token prices.

Some projects eager to launch tokens saw their founding teams retreating to the background, attempting to comply with sufficient decentralized governance. This necessitated governance votes for project decisions, while most token holders lacked the time or energy to fully understand the context of events. Before achieving product-market fit, and even after, project products needed founders to continue rapid iteration. Airdrops often proved to be a mismatch between growth strategies and the execution of startup organizations.

We believe the main lesson from the airdrop era is that an excessive pursuit of decentralization led many projects away from product-market fit. Instead, after validating early product-market fit, token distribution should be more thoughtfully targeted at high-value users and weighted more heavily.

Each era of token distribution has stimulated the growth and development of applications.
Image Source: Inspired by the Application/Infrastructure Cycle [USV]

A Novel Token Distribution Framework: Progressive Ownership

Progressive ownership is built on the foundation of progressive decentralization, indicating that tokens cannot replace product-market fit. This approach employs economic incentives to gradually enhance user loyalty and retention, ultimately achieving ownership. In this model, users are incentivized with revenue sharing (e.g., ETH or stablecoins) but can choose to exchange personal income for tokens representing a share of community revenue.

This is beneficial for users, allowing them to smoothly transition between income and ownership with fewer steps than the previous default of converting tokens to income. This method also enables users to reflect their risk and level of participation within the entire ecosystem.

There are advantages for builders as well, who can leverage revenue-sharing incentives to drive growth, build loyalty, retain control, and iterate quickly without being distracted by the need for sufficient decentralization. Additionally, founders can still strive for liquidity through tokens while attempting to mitigate the risks associated with indiscriminate token distribution.

For projects with early product-market fit and shareable revenue, progressive ownership is merely a proactive choice. While most crypto projects currently have relatively small revenue scales, the list of projects meeting this standard is steadily increasing. Optimism has achieved approximately $30 million in revenue year-to-date. MakerDAO collected $16 million in fees from the protocol in October, with a compound annual growth rate of 25% in average monthly revenue over the past year. ENS generated $1.1 million in revenue over the past month.

Progressive ownership shifts token distribution from an opt-out model to an opt-in model, potentially generating stronger loyalty and network effects due to the increased stakes in the game. As loyal users upgrade to ownership, they become more economically aligned with the network's success and are motivated to encourage others to join, creating a virtuous growth cycle. Users or developers who choose ownership are more likely to lean towards long-term investment, similar to employees of startups with stock options.

In contrast, in the airdrop model, user loyalty may be tested as most users choose to sell tokens and convert them into income, creating downward pressure on prices. Research shows that suffering losses as shareholders decreases customer satisfaction and loyalty towards the company. By choosing ownership, networks can mitigate these boom and bust cycles and the subsequent erosion of user goodwill.

Strategies for Progressive Ownership

Progressive ownership involves three steps:

1. Build products that meet user needs
2. Utilize on-chain revenue sharing to drive user growth, retention, and build a moat
3. Allow high-value users to upgrade to economic ownership (e.g., trading revenue from tokens)

1. Build products that meet user needs

This is the most challenging step. The foundation of the progressive ownership model begins with developing products and services that serve users in novel ways. As Li Jin recently wrote: "Successful startups provide a ladder of feature improvements that enable people to meet core needs."

By addressing these needs, from income to respect, applications can find product-market fit and even cultivate a sense of psychological ownership.

2. Utilize on-chain revenue sharing to drive user growth, retention, and build a moat

Projects can adopt an on-chain revenue sharing model that allows users to share in the success of the product/service, deepening their interest and commitment.

One example is Zora's protocol rewards, which allocate a portion of revenue to creators and developers to incentivize NFT minting. This approach not only enhances user retention but also strengthens defensibility.

Some projects stop here—indeed, this is the standard playbook for web2 companies, ranging from Substack to OnlyFans to YouTube to X/Twitter. Revenue sharing has powerful appeal and clear scalability.

But going beyond revenue sharing is the reason that economic ownership can more meaningfully align users with the long-term success of the platform, rather than forcing them to adapt to short-term gains. Users with economic ownership will have a better understanding of how their contributions drive the platform's growth. This approach stems from the age-old startup employee incentive strategies in Silicon Valley.

3. Allow high-value users to upgrade to ownership

The most loyal super users can choose ownership through tokens that include economic and governance rights. This transition is not automatic and passive; it is a user choice. For example, the most valuable users, measured by generated revenue, can choose: 1) to earn a share of revenue in ETH/stablecoins, or 2) to receive a proportional allocation of tokens in the project's native token.

By choosing the latter, users are exchanging some of their personal income for a portion of the community's total revenue. If the network grows, the community's revenue will increase, and the tokens should enable them to participate proportionally. Additionally, tokens may provide governance over key protocol parameters (e.g., fee or revenue share variables) to ensure long-term consistency.

Moreover, there are more implementation details to address. (Should users stake their tokens to earn platform fees? Should tokens be vested?) However, without delving into extensive discussion, we present a few hypothetical examples:

Returning to Zora, to date, the protocol rewards have distributed approximately 1,008 ETH (nearly $2 million at the time of publication). These rewards are revenue shares, primarily allocated to NFT creators driving minting activity, but also distributed to developers and curators. In a progressive ownership model (assuming Zora launches a token program), top Zora users could choose to claim Zora tokens instead of ETH protocol rewards. How many creators and developers would choose to do so? The proportion might be small, but those who do will have meaningful stakes in the game and may become more active and motivated to grow the network.

Another hypothetical is Farcaster, which charges individual users about $7 annually to store data on the network. Imagine if the protocol shared revenue with developers attracting attention to customers. Developers could then choose whether to pass that value on to end users, similar to a rebate. Alternatively, developers could convert a portion of their revenue share into protocol tokens, enabling them to participate in the ecosystem's growth and governance over key protocol parameters.

Precedents of Web2 Loyalty Models

The progressive ownership model closely relates to the customer loyalty ladder proposed by business researcher James Heskett (2002), which includes four stages: "Loyalty (repeat purchases), Commitment (willingness to recommend the product or service to others), Willingness (taking action to persuade others to use the product or service), Ownership (willingness to recommend improvements to the product or service)."

Progressive ownership recognizes that customer loyalty requires a continuously deepening psychological construct. As users ascend from the income ladder to tokens, they may feel an increasing degree of psychological ownership, ultimately becoming more advocates for others to experience the product—taking on more responsibility for the product's ongoing success, just like owners.

This emotional connection can be cultivated through financial leverage (revenue sharing) as well as product elements (personalized experiences, interactive features, and user input), making users more inclined to become long-term stakeholders.

Utilizing economic ownership to solidify user loyalty also aligns with traditional equity research, indicating that equity can enhance brand loyalty among existing users. As Li Jin wrote:

A study from Columbia Business School found that in a fintech application, allowing users to choose to receive stock after purchasing certain brands led to a 40% increase in weekly spending on those brands… Users intentionally chose to shop at the brands or stores of the stocks they held and invested time, while brands reciprocated with stock to gain loyalty.

Transitioning to a New Era of Token Distribution

The progressive ownership strategy differs significantly from previous eras of token distribution. While ICOs and airdrops still serve as mainstream user acquisition tools, they have proven often ineffective in incentivizing native users, frequently leading founders astray in their search for product-market fit.

In the progressive ownership model, revenue sharing stimulates growth and solidifies loyalty, ultimately leading users to actively choose ownership, ensuring that only the most loyal users become stakeholders. This paves the way for a community of advocates committed to the long-term success of the network. While this model may face unforeseen challenges, it is closely related to precedents of economic ownership enhancing loyalty.

How progressive ownership relates to a fully decentralized compliance framework is the subject of another article. The industry will need novel compliance arguments that enable teams to continue building excellent products while enhancing high-value users through ownership. This is the work we are advancing at Variant.

Innovations in token distribution are fostering new growth and development in the ecosystem, and the script is still being written. We are excited to see the iterations of token distribution that will emerge in the future.