Always PUA? How did integral economics become the standard gameplay for crypto projects?

Original title: "Pointenomics 101: Mastering the New Language of Crypto Incentives"

Author: Kenton

Compiled by: Deep Wave TechFlow

In Web3, A new era of digital loyalty is dawning, driven by innovative points systems. Since Blur launched its groundbreaking points program in 2022, teams have embraced this new incentive mechanism and taken advantage of it. Each new points program pushes the boundaries of incentive design, discovering new reward mechanisms and motivating behaviors. By 2024, we’ve seen a diverse ecosystem of points programs flourish, each adding a unique flavor to the evolving points meta. This rapid development has created rich reward mechanisms and targeted behaviors, providing unprecedented opportunities for user activation and retention. However, for builders new to the industry, understanding the complexities of “point economics” can be a daunting task. That's about to change.

Through conversations with point issuers and analysis of more than 20 points programs, this guide will reveal the benefits, pitfalls, and practical applications of points economics for both new and old point issuers.

The first part will introduce the basics of integrals, while the second part provides a comprehensive overview of integral economics in Web3.

Ready to level up your incentive plan? let's start.

Part One: Getting Started with Points

What are points?

Essentially, Points are a digital reward unit that is valued for its utility or convertible into real benefits – whether that’s exclusive access, product discounts or outright monetary value. Projects strategically deploy points programs not only to build loyalty, but also to drive product adoption, amplify network effects, and shape user behavior in ways that accelerate product growth.

Points program creates a mutually beneficial relationship between brands and users. Companies gain loyalty, growth and data through points programs, while users are rewarded for repeat use. A well-designed points program not only drives long-term engagement but also deepens the emotional connection with users, which is critical to a product’s competitiveness.

Overall, whether it is a Web2 or Web3 company or project, you can get the following benefits from the points program:

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

2. Growth - Because points provide added value, they reduce the actual price of a product or service, thereby increasing conversion rates in marketing channels, driving growth in core key performance indicators (KPIs) such as the number of active users .

3. stickiness/loyalty -Points program can improve the user stickiness of the product, thereby increasing the user's lifetime value (LTV) and reducing user churn. Research shows that loyalty members spend an average of 27% more, so product stickiness is achieved when the average LTV exceeds the cost of loyalty membership.

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

Users also get the following benefits from the points program:

1. Incentive value - This value can be in the form of discounts, free products, exclusive access and privileges, and cash rewards.

2. Brand Identity - Effective loyalty programs not only provide transactional rewards, but also make customers feel valued and create an emotional connection with the brand. The highest level of loyalty is when customers have a psychological sense of belonging to the brand.

Part Two: The Economics of Points for Protocols

Traditional Points Schemes

While points schemes have been around in Web2 for decades, their adoption in Web3 has introduced new dynamics and Chance. In Web2, we're familiar with airline loyalty programs like Delta SkyMiles and credit card rewards like Chase Ultimate Rewards. These programs successfully drive customer retention and spending worth billions of dollars every year—sometimes loyalty programs generate more revenue than a company’s core business! However, Web3 takes the concept of points to new heights.

Web3 Points Revolution

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

For example, if Eigenlayer’s capital cost of $18b of TVL is 10% APR, then its points program issues $1.8bn worth of points per year. Other notable plans include Ethena, LRT plans (EtherFi, Swell, Kelp), and Blast.

Unique Advantages of Web3 Projects

In addition to the general benefits, Web3 projects also receive several unique advantages from the points program:

1. Initial Incentives - Projects can be faster than Token Quickly launch a points program, allowing projects to immediately provide user incentives to drive growth from the start. Tokens require careful design, distribution planning, and timing considerations, which can be difficult to prioritize during protocol launch. Tokens are also products and should not be rushed.

2. Token Conversion Potential - Points can be designed to potentially be converted into Tokens in the future, which increases their implicit monetary value. This allows the team to effectively “borrow” liquidity from future Token Generation Events (TGEs) to fund current incentives.

3. Enhanced Flexibility - The points program provides teams with the flexibility to adjust TGE schedules, airdrop allocations, and incentive structures without impacting growth. This flexibility enables more effective market entry strategies. Additionally, teams are free to adjust points programs compared to incentive programs that require governance approval. While token governance is the ultimate goal, in the early stages, a team’s flexibility can become its competitive advantage.

4. Market Timing -Token is better released in a bull market. The points program allows projects to build momentum and community during bear markets, preparing for successful token launches when market conditions improve.

It’s worth noting that these benefits are not limited to pre-TGE conditions. Projects like Ethena and EtherFi received similar benefits through their Season 2 points program even after the token was released.

Points Program Design

Points programs in Web3 have evolved into various complex mechanisms, many of which are used in combination. The most effective programs incorporate behaviors, foundations, and enhancements, and some also begin to experiment with planned rewards. Let’s take a closer look at each one.

Planned behavior

Planned behavior details the user’s behavior and actions that will earn points, such as depositing money on L2 or trading on the new AMM (Automated Market Maker). Including the following categories:

• Hold unlocked assets-Assets that users can freely deposit and withdraw (such as LRTs, Pendle YTs, Ethena’s sUSDe mortgage deposit on Morpho)

• Hold locked assets- Assets that users need to wait for a period of time to withdraw (such as locked Ethena USDe, local restaking on Eigenlayer, Karak and Symbiotic)

• Providing liquidity - Similar to unlocking assets, but with the passive sale of deposited assets Risks (e.g. Thruster LP positions staked in Hyperlock)

• Social Interactions - Likes, Retweets, Comments and Follows

Program Basics

Program Basics include the core details of the points program, e.g. Points issuance schedule, timeline and airdrop scale. Most points programs are divided into seasons, each lasting 3-6 months, with each season having unique base terms.

1. Issue Schedule - Indicates how often and how much points are accumulated

   1. Discrete Rewards -One-time allocation of points for specific actions. For initiating actions and marketing. Examples include Blur’s one-time rewards for listing NFTs within 14 days, Lyra’s one-time rewards for participating in Twitter/X Space events, and Napier’s social interaction and referral rewards.

   2. Continuous Rewards

      1. Fixed supply issuance - the total supply of points is fixed throughout the program (e.g. Hyperliquid) or within a period/season (e.g. Morpho*). While both reduce dilution for users, fixed-plan provisioning provides greater certainty, while fixed-period provisioning allows teams to be more flexible on issuance schedules. Teams often use a fixed supply release basis to provide additional assurance to users.

      2. Variable issuance - (e.g. Eigenlayer, all major LRTs, Ethena, etc.). The total supply is variable and adjusted based on TVL (Total Locked Volume). Points are calculated in USD or ETH per day of participation, with a variable issuance schedule that dynamically dilutes early depositors’ shares. While the expected airdrop rewards (in USD) attract new deposits, in order to avoid dilution, users must increase their participation in tandem with the growth of total deposits. The team likes this distribution method because it simplifies the operational complexity of ensuring points are fairly distributed among all participants. To reduce dilution for the earliest users and inspire a sense of urgency, the team will publish a decreasing accumulation rate schedule (e.g. 25 points per day in July, 20 points per day in August, etc.).

2. Issue time - Points issuance period

   1. Clear vs. Vague -Most projects will give a fixed points plan or season length (such as 6 months), but some projects will give a range (such as 3-6 months). To gain more flexibility, some teams will opt for vague timelines, although this may impact growth.

   2. Conditional - Some programs or seasons are designed to end early when key milestones are reached. If expected seasonal airdrop allocations are fixed, this adds a sense of urgency to participate. For example, Ethena set a $1 billion TVL milestone in its first season and hit it in just seven weeks.

* While Morpho is incentivized with non-transferable $MOPRHO tokens, it operates like a points issuer.

Plan Boost

Plan Boost is the main tool used by the team to reward users for specific behaviors, giving users a higher relative share of points. The following are various improvement mechanisms:

• Service Quality Improvement - Projects can improve a certain user group (such as traders) by incentivizing the "service quality" of another user group (such as liquidity providers) product experience. For systems that can differentiate on “service,” like the Univ3 pool, projects can allocate points based on users’ contributions to the product’s user experience (such as liquidity). For example, Blur rewards liquidity providers who quote prices closer to the NFT floor price, and Merkl’s incentive mechanism favors Univ3 liquidity providers who quote competitive quotes and earn more transaction fees.

• Recommend -Refer others and get a portion of their points (like 10%). This helps with marketing and attracting large customers or high-volume users. There is a risk of fake accounts as users may recommend their own addresses. Some programs will require a referral code to access the app to generate additional marketing buzz, although this may reduce conversion rates. Such as Ethena and Blackbird.

• Phased referral rewards -An extension of the simple referral system. Users not only receive a share of points from their direct recommenders (i.e., the first tier), but also a share of points from their referrers’ recommenders (i.e., a second tier). The goal is to encourage users to recommend people who are expected to actively recommend others. There is a risk of fake accounts as users may recommend their own addresses. Such as Blur and Blast.

• Basic Improvement -Projects can add amplification improvements to attract and cultivate heavy users. The basic idea is that your base point accumulation rate increases with usage, allowing you to earn rewards faster for the same usage. Ordinary users may receive less compensation, making it difficult to attract. For example, Aevo offers traders a base volume boost.

• Market Launch Boost -Projects use launch boosts to attract liquidity and launch new markets before network effects take effect. Launch promotions usually have an expiration time, but there can be other thresholds. For example, some LRT projects, such as EtherFi, offer liquidity providers a two-week double startup boost every time a new Pendle market is initialized.

• Loyalty promotion -Give extra points to users who are loyal to a product (i.e. prove to use product A instead of product B). This is especially effective for products that rely on network effects; when competitors' networks shrink, the relative value of the product increases. Blur used this boost to quickly gain market share from OpenSea upon launch. This boost is more effective for NFTs because their scarcity, especially when owners of a series typically only own one unit each, forces them to choose an allegiance; however, with fungible tokens, users can spread their balances to Multiple addresses to avoid undue stress.

• 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 points to determine the luck of rarity in awarding care packages. While users do not know the absolute reward size, they do know the relative amounts between each care package. Similarly, Aevo uses a "lucky" transaction volume boosting system, where any user's transaction is likely to receive a transaction volume boost, thus amplifying the reward for that transaction; both projects use a tiered boosting system, with the highest boost starting with the lowest. Frequency grant (e.g. 1% chance of getting a 25x boost).

• Leaderboard Promotion -In order to encourage competition among users, the project will provide ranking promotion for the top 100 point winners. This concentrates points in the hands of top users, but this may result in a higher absolute KPI because users are competing. Although not heavily promoted, Blur used this boost in its third season.

• Native Token Locked Boost -Projects with native tokens provide boosts to point earners who demonstrate long-term belief. Because this may reduce the number of tokens in circulation, teams should expect an increase in the volatility of their tokens. Examples include Ethena's $ENA, Safe and $SAFE.

• Total Locked Volume (TVL) Boost -Projects can incentivize user promotion and marketing by rewarding points boosts based on TVL growth. For example, 3Jane’s AMPL-style points program realigns point ownership based on TVL changes, and Overload promises to increase airdrop allocations when certain TVL milestones are reached.

• Team Boost -Get group-wide boosts by incentivizing social pressure and coordination. AnimeChain is the first project to try this approach, with its Squads group for sharing boosts with others.

• Lock-in Boost -In addition to a decreasing planned base schedule (rewarding past stickiness and aiming to get users to participate early), some projects have begun to try to reward future stickiness boosts. For example, EtherFi provided a 1-2x increase in StakeRank in its second quarter and Hourglass provided a 1-4x increase in liquidity locks for different tenors.

Plan Rewards

Finally, plan rewards are other direct benefits besides airdrop expectations. 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 revenue sharing.

While this segment is still small at the moment, I believe more teams will experiment with points holder rewards, borrowing from Web2 mechanisms such as product fee discounts, event access, and other benefits.

Integrate all the elements

The flexibility of these building blocks allows for more creative points program design. Once a team determines its goals (such as user acquisition, product improvement, marketing, etc.), it can combine multiple building blocks sequentially or in parallel for maximum effect. Here are some innovative use cases that go beyond the traditional “deposit boost TVL” strategy:

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

• Napier’s strategy is to incentivize asset holders on social engagement and other projects to increase partnerships and expand marketing reach.

• Blur’s go-to-market strategy (GTM) leverages various points mechanisms across multiple airdrops to quickly establish supply and demand in the NFT market and quickly gain market share upon its public launch. By using random boosting care packages, their advanced strategy is as follows:

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

  • Launch Supply - Airdrop 1 rewards now There is a new list of NFT traders

  • Building supply from loyal users - Airdrop 2 is larger than Airdrop 1, rewards more lists, and boosts those loyal lists that move liquidity from other NFT markets to Blur

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

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

Next, when the project prepares for TGE and the first airdrop, they will explore how to distribute tokens to point holders. Although this article does not discuss the specific airdrop mechanism, teams should consider the following factors: airdrop tokens vs. option forms, fixed vs. dynamic allocation, linear vs. non-linear allocation, vesting period, lock-up, Sybil attack prevention, and allocation implementation. If you want to know more, you can refer to this post for the latest information.

Criticisms and Disadvantages of the Points Scheme

Although the points scheme has proven to be effective, there are some criticisms. The points plan is completely a centralized incentive mechanism. Point accumulation calculations, data storage, planning schedules, and criteria are generally opaque to users and are typically stored in off-chain databases. Therefore, point issuers must be as transparent as possible to build trust with users. If users don’t trust the terms of a points program, they won’t value those points and won’t actively participate.

Due to legal reasons, the team cannot usually disclose upcoming airdrops or allocations to point holders before the token launch, but they can make up for this with concise communication, timely disclosure of plan adjustments, and quick fixes for bugs. EtherFi is a great example of how it handles computational errors.

Other public criticisms, such as ungenerous allocations to point holders and airdrop allocations being vulnerable to Sybil attacks, are actually issues with the airdrop program, not the points program. Points are just a tool used to motivate and record the shares owned by users. Airdrop terms determine how, when, and how much point holders receive rewards.

Taking Eigenlayer as an example, what users are dissatisfied about is not their point balance, but the ratio of points converted into airdrops and the undisclosed claim standards. Earning only 5% TGE on deposits for 11 months, points holders feel they are being taken advantage of and earning well below the market average. Additionally, many points holders were unexpectedly geo-blocked from claiming their $EIGEN share. While the team has complete discretion over token allocation, they can avoid this issue by geo-blocking products in advance. It’s a similar story with Blast – users aren’t dissatisfied with their points balance. Blast airdropped 7% to point holders and required the top 1,000 wallets to partially lock up for 6 months. For a program that is less than 6 months old, this is pretty consistent with other airdrop seasons (e.g. Ethena, EtherFi, etc.).

While this is not a criticism of the program design, point fatigue is increasingly an issue in the ecosystem, and this is reflected in both public forums and private discussions with DeFi whales. Understanding the value of points takes time and effort. For each new scheme, users need to build an initial model and continually update their assumptions to ensure they receive the best return on capital or action. As new points programs flood the ecosystem, users struggle to keep up, leading to fatigue and sluggishness in migrating between points programs. For example, imagine you have two options, get 1,000 units of points A every day and get 2 million units of points B every day - which one is more valuable? Is the more valuable one still worth risking capital? The answer isn't immediately clear. Programs that cannot immediately differentiate their points program from others will have less impact from their points.

A final important and hidden side effect of points systems is that they can obscure product market fit (PMF). Points are a great bootstrapping mechanism, but they run the risk of hiding organic interest, which is critical to finding PMF. Even after a PMF is validated, teams still need to build enough organic traction to find sustainability in their product or service before tightening incentives. Variant's Mason Nystrom calls it a "hot start problem." For teams that have not yet validated the PMF, I recommend validating the PMF in a closed alpha program before introducing points. This is a bit trickier for teams that have already validated PMF, but Mason recommends that teams "take extra steps to ensure token rewards are used organically and drive important metrics like engagement and retention."

Future Looking

going forward, I expect the points program to continue to evolve to address the most pressing issues, such as transparency of the program and points fatigue. In order to improve the transparency of the total points supply, distribution logic and accumulation history, future points plans or parts thereof will be implemented on the chain. Examples of on-chain points implementations include 3Jane’s AMPLOL and Frax’s FXLT points. Another software provider that provides on-chain points management infrastructure is Stack.

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

Conclusion

Points have become a powerful tool in the Web3 ecosystem, providing benefits beyond traditional loyalty programs.

They enable projects to reward loyal premium users, bootstrap network effects, and optimize their market entry strategies in a more predictable way. This leads to more efficient product development and ultimately value to the end user.

As this field matures, I expect there will continue to be innovation in the design and implementation of points programs. The key to success is finding a balance between transparency and flexibility, and tightly aligning the points program with overall project goals and user needs.

For builders and projects in the Web3 space, understanding and harnessing the power of a well-designed points program can be a key factor in achieving sustainable growth. As we move forward, points will likely continue to be a fundamental part of crypto’s incentive structure, continuing to shape the landscape of DeFi and beyond.

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