Where did the token rewards go?

Original Author: FLORIAN STRAUF

Original Compilation: Frost, BlockBeats

Editor's Note: Where do the rewards from airdrops or staking actually go? Perhaps most people haven't thought carefully about this question. Token incentive programs, as an important part of the blockchain industry, are being widely adopted, but there are not many articles analyzing the effectiveness of these incentives in the market. Are such reward mechanisms really effective? This article analyzes the token reward mechanism, and BlockBeats compiles the original text as follows:

Recently, someone asked me this question: "How do recipients of token rewards handle the tokens?"

If we look at the recent $JUP airdrop from Jupiter, the answer is that most of them are selling.

Reward recipients have two options: sell or hold.

If we analyze further, selling or holding is a matter of individual risk preference regarding token ownership. Generally, cryptocurrency startups are highly risky, so people have a threshold for how much they want to allocate to this project. If the rewards exceed that threshold and the motivation to hold is not strong enough, they may ultimately be sold.

Why Offer Rewards?

Rewards are a powerful tool for token initiators. Minting tokens incurs no cost, and selling them can yield profits.

Projects gain free capital and can incentivize others (liquidity providers, users, etc.) to interact with the protocol. This can guide the market and subsidize buyers and sellers to drive business growth.

Initiators may hope that over time, the number of buyers and sellers will keep the market running organically without internet funding.

Undoubtedly, free tokens are a great tool. Almost every project that launches tokens uses it for incentives. But the question is, how effective are these incentives?

Is This Effective?

Staking rewards are a form of incentive. In its initial form, staking is a mechanism where the proof-of-stake base layer pays validators with minted internet currency.

However, non-base layers have adopted this strategy to pay token holders fees to retain users. Currently, it is a popular mechanism implemented by many protocols.

When we talk about staking rewards from non-base layers, the goal is usually to retain customers, meaning people receive rewards for holding tokens.

Can Token Reward Activities Retain Token Holders?

I compared the yield from $GMX payments with the yield from corporate bonds. Most people are unlikely to hold risk assets like $GMX for yields as low as 3-4%. They will engage in low-buy high-sell behaviors because they see the potential of the project.

In this case, I believe token reward activities cannot retain holders, or their effect is very minimal.

Average Customer Retention Rate

Token holders and customers are not the same, but there is some overlap.

We can consider rewards as the cost of retaining customers or token holders. It is similar to dividends as a mechanism for retaining shareholders (except dividends are not physical payments).

Similarly, airdrops can be viewed as a customer acquisition cost. Unfortunately, there is not much data on the effectiveness of staking rewards, but there are some good examples of airdrops.

For instance, 7% of airdrop recipients still held $UNI at some point after the airdrop. This somewhat aligns with the airdrop activity from Jupiter mentioned above.

Kerman Kohli conducted a detailed analysis of the customer acquisition cost of the Looksrare airdrop, details can be found in this article.

Although airdrops are not entirely comparable to staking, they both show poor user retention rates for reward activities, so I believe the outcomes are roughly the same.

By the way, here is the situation of Jupiter's airdrop:

Dune: https://dune.com/jhackworth/jupiter-airdropDune

Comparison (Source):

Supply Meets Demand

The downside is that projects not only spend money but also tokens to acquire customers. Many of these tokens will ultimately become selling pressure in the market.

If they do not encounter buyers who can withstand this selling pressure, the token price may drop, weakening the incentives and potentially creating the following cycle.

What I want to say is that token incentives are helpful, but they may not be as effective as people imagine. When the circulation of tokens is large, people need a strong reason to buy and hold. If users are to do this, there should be substantial real returns, governance rights, token buyback mechanisms, or a steadily growing project.