Always being PUA? How did points economics become a standard gameplay for crypto projects?

Original Title: “Pointenomics 101: Mastering the New Language of Crypto Incentives”

Author: Kenton

Compiled by: Deep Tide TechFlow

A new era of digital loyalty driven by innovative point systems is emerging in Web3. Since Blur launched its groundbreaking point program in 2022, various teams have adopted this new incentive mechanism and leveraged its advantages. Each new point program pushes the boundaries of incentive design, discovering new reward mechanisms and motivating behaviors. By 2024, we have seen a diverse ecosystem of point programs flourishing, with each project adding a unique flavor to the ever-evolving point meta. This rapid development creates rich reward mechanisms and target behaviors, providing unprecedented opportunities for user activation and retention. However, for new builders entering the field, understanding the complexities of "pointonomics" can be a daunting task. This situation is about to change.

Through conversations with point issuers and analysis of over 20 point programs, this guide will reveal the benefits, shortcomings, and practical applications of pointonomics for both new and established point issuers.

The first part will introduce the basics of points, while the second part will provide a comprehensive overview of pointonomics in Web3.

Ready to elevate your incentive program? Let’s get started.

Part One: Introduction to Points

What are Points?

Essentially, points are a unit of digital rewards whose value lies in their utility or convertibility into real benefits—whether exclusive access, product discounts, or direct monetary value. Projects strategically deploy point programs not only to foster loyalty but also to drive product adoption, amplify network effects, and shape user behavior in ways that accelerate product growth.

Point programs establish a mutually beneficial relationship between brands and users. Companies gain loyalty, growth, and data through point programs, while users are rewarded for repeat usage. A well-designed point program can not only drive long-term engagement but also deepen users' emotional connections, which is crucial for a product's competitiveness.

Overall, whether for Web2 or Web3 companies or projects, the following benefits can be derived from point programs:

1. Marketing - When combined with referral programs, points can expand marketing channels.

2. Growth - Since points provide added value, they lower the effective price of products or services, thereby increasing conversion rates in marketing channels and driving growth in core key performance indicators (KPIs), such as the number of active users.

3. Stickiness/Loyalty - Point programs can enhance user stickiness to products, increasing user lifetime value (LTV) and reducing churn. Research shows that loyal members spend an average of 27% more, so when the average LTV exceeds the cost of loyal members, product stickiness is achieved.

4. Market Timing - Dynamic point programs can help products with network effects launch, such as social media platforms and financial markets. By rewarding early adopters, companies can improve user experience (UX) before the product reaches critical mass.

Users can also gain the following benefits from point programs:

1. Incentive Value - This value can manifest as discounts, free products, exclusive access and privileges, and cash rewards.

2. Brand Affinity - Effective loyalty programs not only provide transactional rewards but also make customers feel valued and establish an emotional connection with the brand. The highest form of loyalty is when customers feel a psychological belonging to the brand.

Part Two: The Pointonomics of Protocols

Traditional Point Programs

While point programs have existed in Web2 for decades, their adoption in Web3 introduces new dynamics and opportunities. In Web2, we are familiar with airline loyalty programs like Delta SkyMiles and credit card rewards like Chase Ultimate Rewards. These programs have successfully driven customer retention and spending, generating billions of dollars annually—sometimes the revenue from loyalty programs even exceeds the core business of the company! However, Web3 elevates the concept of points to new heights.

The Web3 Points Revolution

The first Web3 project to introduce points was Blur, which triggered a ripple effect in the cryptocurrency space in 2022. Many projects followed suit, some achieving impressive scale.

For example, if Eigenlayer's $18b TVL has a capital cost of 10% APR, its point program distributes points worth $1.8 billion annually. Other notable programs include Ethena, the LRT program (EtherFi, Swell, Kelp), and Blast.

Unique Advantages of Web3 Projects

In addition to the general benefits, Web3 projects gain several unique advantages from point programs:

1. Early Incentives - Projects can launch point programs faster than tokens, allowing them to immediately provide user incentives and drive growth from the start. Tokens require careful design, allocation planning, and timing considerations, which may be difficult to prioritize during protocol launches. Tokens are also products and should not be rushed.

2. Token Conversion Potential - Points can be designed to potentially convert to tokens in the future, increasing their implicit monetary value. This allows teams to effectively "borrow" liquidity from future token generation events (TGEs) to fund current incentives.

3. Enhanced Flexibility - Point programs provide teams with the flexibility to adjust TGE timelines, airdrop allocations, and incentive structures without affecting growth. This flexibility enables more effective market entry strategies. Additionally, compared to incentive programs that require governance approval, teams can freely adjust point programs. While token governance is the ultimate goal, team flexibility in the early stages can become a competitive advantage.

4. Market Timing - Tokens perform better when released during bull markets. Point programs allow projects to build momentum and community during bear markets, preparing for successful token releases when market conditions improve.

Notably, these benefits are not limited to pre-TGE scenarios. Projects like Ethena and EtherFi continue to gain similar advantages through their second-season point programs even after token releases.

Point Program Design

Point programs in Web3 have evolved into various complex mechanisms, many of which are used in combination. The most effective programs include behaviors, foundations, and boosts, with some beginning to experiment with program rewards. Let’s delve into each one.

Program Behaviors

Program behaviors detail the actions users can take to earn points, such as depositing on L2 or trading on a new AMM (Automated Market Maker). These include the following categories:

• Holding Unlocked Assets - Assets that users can freely access (e.g., LRTs, Pendle YTs, Ethena's sUSDe collateral deposits on Morpho).

• Holding Locked Assets - Assets that users must wait a period to withdraw (e.g., locked Ethena USDe, local re-staking on Eigenlayer, Karak, and Symbiotic).

• Providing Liquidity - Similar to unlocked assets but with the risk of passively selling deposited assets (e.g., Thruster LP positions staked in Hyperlock).

• Social Interactions - Likes, retweets, comments, and follows.

Program Foundations

Program foundations include the core details of the point program, such as the point distribution schedule, timeline, and airdrop scale. Most point programs are divided into multiple seasons, each lasting 3-6 months, with unique foundational terms for each season.

1. Distribution Schedule - Specifies the frequency and amount of point accumulation.

2. Discrete Rewards - One-time point allocations for specific actions. Used to initiate behaviors and marketing. For example, Blur's one-time reward for listing NFTs within 14 days, Lyra's one-time reward for participating in Twitter/X space events, and Napier's social interaction and referral rewards.

3. Continuous Rewards

   1. Fixed Supply Distribution - The total supply of points is fixed throughout the program (e.g., Hyperliquid) or fixed within a period/season (e.g., Morpho*). While both reduce user dilution, fixed program supply offers greater certainty, while fixed period supply allows teams more flexibility in the distribution schedule. Teams often use fixed supply distribution foundations to provide users with additional assurance.

   2. Variable Distribution - (e.g., Eigenlayer, all major LRTs, Ethena, etc.). The total supply is variable and adjusts based on TVL (Total Value Locked). Points are calculated based on the dollars or ETH participated daily, and variable distribution schedules dynamically dilute early depositors' shares. While the anticipated airdrop rewards (in dollars) attract new deposits, users must increase their participation in sync with total deposits to avoid dilution. Teams prefer this distribution method because it simplifies the operational complexity of ensuring fair point distribution among all participants. To reduce dilution for the earliest users and create a sense of urgency, teams may release a decreasing accumulation rate schedule (e.g., 25 points per day in July, 20 points per day in August, etc.).

4. Distribution Duration - The duration of point distribution.

5. Explicit vs. Ambiguous - Most projects provide a fixed duration for the point program or season (e.g., 6 months), while some projects give a range (e.g., 3-6 months). For greater flexibility, some teams choose ambiguous timelines, though this may impact growth.

6. Conditional - Some programs or seasons are designed to end early upon reaching key milestones. If the anticipated seasonal airdrop allocation is fixed, this increases the urgency to participate. For example, Ethena set a $1 billion TVL milestone in the first season and achieved it in just seven weeks.

*While Morpho uses non-transferable $MOPRHO tokens as incentives, its operation is similar to point issuers.

Program Boosts

Program boosts are the primary tools teams use to reward users for specific behaviors, granting users a higher relative share of points. Here are various boost mechanisms:

• Quality of Service Boost - Projects can enhance the product experience for one user group (e.g., traders) by incentivizing another user group (e.g., liquidity providers) for their "quality of service." For systems where differentiation can be made on "service," such as Univ3 pools, projects can allocate points based on users' contributions to product user experience (e.g., liquidity). For example, Blur rewards liquidity providers who quote closer to NFT floor prices, while Merkl's incentive mechanism favors Univ3 liquidity providers who quote competitively and earn more trading fees.

• Referrals - Referring others and earning a portion of their points (e.g., 10%). This helps with marketing and attracting large clients or high-volume users. There is a risk of fake accounts, as users may refer their own addresses. Some projects require referral codes to access applications, generating additional marketing buzz, although this may lower conversion rates. For example, Ethena and Blackbird.

• Tiered Referral Rewards - An extension of a simple referral system. Users can earn not only their direct referrer's point share (i.e., first tier) but also their referrer's referrer's point share (i.e., second tier). The goal is to encourage users to refer those expected to actively refer others. There is a risk of fake accounts, as users may refer their own addresses. For example, Blur and Blast.

• Base Boost - Projects can add amplifying boosts to attract and nurture heavy users. The basic idea is that your base point accumulation rate increases with usage, allowing for faster rewards at the same usage level. Ordinary users may receive less compensation, making it difficult to attract them. For example, Aevo offers base trading volume boosts for traders.

• Market Launch Boost - Projects use launch boosts to attract liquidity and initiate new markets before network effects take hold. Launch boosts typically have expiration times but can also have other thresholds. For example, some LRT projects (like EtherFi) offer liquidity providers two weeks of double launch boosts each time a new Pendle market is initialized.

• Loyalty Boost - Additional points for users loyal to a product (i.e., proving usage of product A over B). Particularly effective for products reliant on network effects; as competitors' networks shrink, the relative value of the product increases. Blur leveraged this boost to rapidly attract market share from OpenSea after its launch. This boost is more effective for NFTs due to their scarcity, especially when owners of a series typically own only one unit, forcing them to choose loyalty; however, for fungible tokens, users can spread their balances across multiple addresses to avoid excessive pressure.

• Random Reward Boost - Drawing from the Skinner Box experiment, some projects attract more participation and attention through randomness in reward size or timing. Blur's care package reward system uses loyalty scores to determine the rarity luck when rewarding care packages. While users do not know the absolute size of rewards, they know the relative number between each care package. Similarly, Aevo uses a "lucky" trading volume boost system, where any of a user's trades could earn a trading volume boost, amplifying the rewards for that trade; both projects use tiered boost systems, with the highest boosts granted at the lowest frequencies (e.g., a 1% chance of receiving a 25x boost).

• Leaderboard Boost - To encourage competition among users, projects offer leaderboard boosts for the top 100 point earners. This concentrates points among top users but may lead to higher absolute KPIs as users compete. Although not heavily promoted, Blur used this boost in Season 3.

• Native Token Locking Boost - Projects with native tokens offer boosts to point earners who demonstrate long-term belief. Since this may reduce the circulating supply of tokens, teams should anticipate increased volatility for their tokens. Examples include Ethena's $ENA, Safe, and $SAFE.

• Total Value Locked (TVL) Boost - Projects can incentivize users to promote and market by rewarding points based on TVL growth. For example, 3Jane's AMPL-style point program readjusts point ownership based on TVL changes, and Overload promises to increase airdrop allocations upon reaching certain TVL milestones.

• Team Boost - Achieving group boosts through incentivizing social pressure and coordination. AnimeChain was the first project to attempt this approach, using its Squads group to share boosts with others.

• Locking Boost - In addition to a decreasing program foundation timeline (rewarding past stickiness and designed to encourage early user participation), some projects have begun experimenting with rewarding future stickiness boosts. For example, EtherFi offers StakeRank 1-2x boosts in its second season and Hourglass offers 1-4x boosts for liquidity locking of different durations.

Program Rewards

Finally, program rewards are other direct benefits beyond anticipated airdrops. Speculation about future airdrops drives most point demand, but some projects are trying to provide additional utility for point holders, such as Rainbow Wallet's ETH yield sharing.

While this section is currently small, I believe more teams will attempt point holder rewards, drawing from Web2 mechanisms like product fee discounts, event access, and other perks.

Integrating All Elements

The flexibility of these building blocks allows for more creative point program designs. Once teams determine their goals (such as user acquisition, product improvement, marketing, etc.), they can sequentially or concurrently combine multiple building blocks for maximum effect. Here are some innovative use cases that go beyond traditional "deposit boosts TVL" strategies:

• Ethena's strategy is to give points to USDe holders and increase yields for sUSDe holders.

• Napier's strategy is to incentivize social participation and asset holders from other projects to increase partnerships and expand marketing reach.

• Blur's go-to-market strategy (GTM) leveraged various point mechanisms across multiple airdrops to rapidly establish supply and demand in the NFT market and quickly gain market share at its public launch. By using random boost care packages, their advanced strategy is as follows:

• User Acquisition - Airdrop 0 rewards to private alpha testers to attract the most active NFT traders.

• Launch Supply - Airdrop 1 rewards new listings for existing NFT traders.

• Build Supply from Loyal Users - Airdrop 2 is larger than Airdrop 1, rewarding more listings and boosting those loyal list makers who transfer liquidity from other NFT markets to Blur.

• Stimulate Demand - Airdrop 3 rewards competitive bidding to incentivize trading volume.

After the project designs its point program and GTM, attention will turn to program implementation. Point accumulation calculations, data pipelines, price feeds, and point data storage are all components of the point program backend. Once the backend is complete, the project will focus on user-facing implementation, typically a public dashboard displaying user point balances and point leaderboards. Many projects build their implementations from scratch, but some outsource work to developers and other infrastructure providers.

Next, when projects are ready for TGE and the first airdrop, they will explore how to distribute tokens to point holders. Although this article does not discuss specific airdrop mechanisms, teams should consider the following factors: the form of airdropped tokens versus options, fixed versus dynamic allocations, linear versus nonlinear distributions, vesting periods, locking, witch attack prevention, and distribution implementation. For more information, you can refer to this post for the latest insights.

Critiques and Shortcomings of Point Programs

While point programs have proven effective, there are also some criticisms. Point programs are entirely centralized incentive mechanisms. The calculations for point accumulation, data storage, program timelines, and standards are often opaque to users and typically stored in off-chain databases. Therefore, point issuers must maximize transparency to build trust with users. If users do not trust the terms of the point program, they will not value these points and will not actively participate.

Due to legal reasons, teams typically cannot disclose upcoming airdrops or allocations for point holders before token releases, but they can compensate for this through clear communication, timely disclosure of program adjustments, and quick error corrections. EtherFi is a good example of handling calculation errors.

Other public criticisms, such as being ungenerous with point holder allocations and being susceptible to Sybil attack in airdrop distributions, are actually issues with the airdrop programs rather than the point programs. Points are merely tools used to incentivize and record users' shares. Airdrop terms determine how, when, and how much rewards point holders receive.

Take Eigenlayer as an example; users are dissatisfied not with their point balances but with the ratio of points converted to airdrops and the undisclosed claiming criteria. Depositing for 11 months only yielded 5% of TGE, leading point holders to feel exploited, with returns far below market averages. Additionally, many point holders were unexpectedly geo-blocked from claiming their $EIGEN shares. While teams have complete discretion over token distributions, they could avoid this issue by geo-blocking products in advance. Blast faced a similar situation—users were not dissatisfied with their point balances. Blast airdropped 7% to point holders and required the top 100 wallets to partially lock for 6 months. For a program lasting less than 6 months, this is consistent with other airdrop seasons (e.g., Ethena, EtherFi, etc.).

While this is not a critique of program design, point fatigue is increasingly becoming an issue in the ecosystem, as reflected in public forums and private discussions with DeFi whales. Understanding the value of points requires time and effort. For each new program, users need to build an initial model and continuously update their assumptions to ensure they receive optimal capital or behavioral returns. As new point programs flood the ecosystem, users struggle to keep up, leading to fatigue and sluggish migration between point programs. For example, imagine you have two options: earning 1,000 units of point A daily and earning 2 million units of point B daily— which is more valuable? Is the more valuable one still worth the capital risk? The answer is not immediately clear. Projects that cannot immediately differentiate their point programs from others will have less impact.

The final important and subtle side effect of point systems is that they may obscure product-market fit (PMF). Points are excellent guiding mechanisms, but they carry the risk of hiding organic interest, which is crucial for finding PMF. Even after PMF is validated, teams still need to establish sufficient organic appeal to find sustainability for their products or services before tightening incentives. Variant's Mason Nystrom calls this the "hot start problem". For teams that have not yet validated PMF, I recommend introducing points only after validating PMF in a closed alpha program. For teams that have already validated PMF, it becomes a bit tricky, but Mason suggests that teams "take extra steps to ensure token rewards are used for organic usage and drive important metrics like engagement and retention."

Future Outlook

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

To enhance transparency regarding total point supply, allocation logic, and accumulation history, future point programs or parts of them will likely be implemented on-chain. Examples of on-chain point implementations include 3Jane's AMPLOL and Frax's FXLT points. Another software provider offering on-chain point management infrastructure is Stack.

Addressing point fatigue is a more complex challenge. While private chats and discussions on CT often focus on how to differentiate program designs, the key to reducing fatigue may lie in enabling users to quickly and confidently assess point value. This ability will significantly simplify comparisons between various point opportunities, making participation decisions easier and less confusing. While this is not part of point program design, secondary markets (like Whales Market) can help users price points and reduce fatigue, although currently, liquidity is insufficient to support most point exit strategies. However, as these markets mature, they may become very important for price discovery, providing exit strategies, and creating a more dynamic point economy.

Conclusion

Points have become a powerful tool in the Web3 ecosystem, offering benefits that go beyond traditional loyalty programs. They enable projects to reward loyal high-value users, guide network effects, and optimize their go-to-market strategies in a more predictable manner. This leads to more effective product development and ultimately delivers value to end users.

As this field matures, I expect the design and implementation of point programs to continue innovating. The key to success lies in finding a balance between transparency and flexibility, closely aligning point programs with overall project goals and user needs.

For builders and projects in the Web3 space, understanding and leveraging the power of well-designed point programs may be a crucial factor in achieving sustainable growth. As we move forward, points may continue to be a fundamental component of crypto incentive structures, shaping the landscape of DeFi and beyond.