Token launch double-edged sword: launching too early may be a mistake, but it can also create incentive effects
Markets and networks that launched tokens from the very beginning must find product-market fit within a shortened timeframe.Author: MASON NYSTROM
Compiled by: Deep Tide TechFlow
It has been shown that combining Tokens (or Token promises) with new innovative products can effectively alleviate cold start issues. However, while speculative activities can bring benefits in terms of network activity, they also have negative impacts in terms of short-term liquidity and unnatural users.
Markets and networks that launch Tokens (or do so before establishing sufficient natural demand) must find product-market fit (PMF) within a shortened window; otherwise, they will run out of valuable Token resources.
My friend and investor Tina refers to this as the "hot start problem," where the existence of Tokens limits the time window for startups to find PMF and gain sufficient natural traction to retain users and liquidity when Token rewards decrease.
Applications released with point systems also encounter hot start problems, as users now implicitly have expectations regarding the tokens.
I really like the term "hot start problem" because one of the core differences between Crypto and Web2 is the ability to leverage Tokens as financial incentives to kickstart new networks.
This strategy has proven effective, especially in DeFi protocols such as MakerDAO, DyDx, Lido, and GMX. Token launches have also been shown to be effective for other Crypto networks, from decentralized IoT networks (like Helium) to infrastructure (like Layer 1 blockchains) and certain middleware (like Oracles). However, networks that choose to scale quickly through Tokens and face hot start problems encounter several trade-offs, including blurring natural traction and PMF, prematurely exhausting Token resources, and increasing operational task complexity due to DAO governance (such as fundraising, governance decisions, etc.).
Why Choose the Hot Start Problem?
In two scenarios, the hot start problem is more favorable than the cold start problem:
Startups competing in a fiercely competitive and well-known red ocean market
Products and networks with passive supply-side participation
Red Ocean Market
The core disadvantage of the hot start problem is the difficulty in assessing natural demand, but this issue is somewhat alleviated in categories with strong product-market fit (PMF). In this case, later competitors can potentially challenge pioneers by launching Tokens early. The DeFi space provides many examples of latecomers overcoming the hot start problem by effectively utilizing Tokens to launch new protocols. While Bitmex and Perpetual Protocol were the first centralized and decentralized exchanges to offer perpetual contracts, later entrants GMX and dYdX rapidly increased liquidity through Tokens, becoming leaders in the perpetual contract market. Newer DeFi protocols like Morpho and Spark have successfully launched billions in total locked value (TVL) in lending, despite pioneers like Compound and Aave (formerly ETHlend) still dominating. Nowadays, when demand for new protocols is clear, Tokens (and points) become the default choice for liquidity initiation. For example, liquid staking protocols actively leverage points and Tokens to increase liquidity in competitive markets.
In the Crypto consumer space, Blur showcases a strategy for competing in a red ocean market, with its market-defined point system and Token launch making Blur the dominant Ethereum NFT marketplace by trading volume.
Passive vs. Active Supply Participation
Compared to active supply networks, the hot start problem is easier to overcome in passive supply networks. A brief history of Token economics indicates that Tokens are very useful for launching networks when there are passive tasks to be completed, such as staking, providing liquidity, listing assets (like NFTs), or setting up and forgetting hardware (like DePIN).
Conversely, while Tokens have also succeeded in launching active networks like Axie, Braintrust, Prime, YGG, and Stepn, the premature appearance of Tokens often blurs true product-market fit. Therefore, the hot start problem is more challenging in active networks than in passive networks.
The lesson here is not that Tokens are ineffective in active networks, but that applications and markets launching Token rewards for completing active tasks (like usage, gaming, gig work, services, etc.) must take extra measures to ensure that Token rewards are used for natural usage and drive important metrics such as engagement and retention. For example, the data labeling network Sapien gamifies labeling tasks and allows users to stake points to earn more points. In this case, passive staking while performing certain actions may serve as a loss aversion mechanism, ensuring participants provide higher quality data labeling.
Speculation: Feature or Flaw
Speculation is a double-edged sword. If integrated early in the product lifecycle, it can be a flaw, but if done strategically, it can also be a powerful feature and growth tool for attracting user attention.
Rather than addressing the cold start problem, startups that launch Tokens before gaining natural traction have opted for the hot start problem. They accept the trade-off of leveraging Tokens as external incentives to attract user attention while betting on their ability to discover or create natural product utility amid increased speculative noise.
