The Balance of Token Incentives and Optimism in Bootstrapping Web3 Networks

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Glasp

Sep 12, 20234 min read

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The Balance of Token Incentives and Optimism in Bootstrapping Web3 Networks

Introduction:

When it comes to bootstrapping Web3 networks, the use of token incentives has become a popular strategy. However, it is important to understand both the limitations of token incentives and the role of optimism in driving innovation and advancement. This article will explore the concept of passive and active participation in network building, the challenges of aligning financial incentives with network utility, and the role of failure in driving progress. By understanding these aspects, we can find a balance between token incentives and optimism to effectively bootstrap Web3 networks.

Passive Participation: When Token Incentives Work:

Several decentralized networks, such as Helium, Arweave, and Compound, have successfully leveraged passive participation from users to increase the utility of their networks. These networks provide financial upside to users without requiring active engagement, benefiting both the supply-side and the overall network. However, networks with passive participation are relatively rare, and it is important to consider the right type of users and the problem they deeply feel when implementing token incentives.

Active Participation: The Limits of Token Incentives:

While token incentives can attract users, they can also attract the wrong type of users who are solely motivated by financial rewards rather than the utility of the network. This can lead to difficulties in reaching the required density of users who contribute value to the network. A disconnect between financial incentives and network utility often results in instant growth followed by a decline. Looksrare and Sushiswap's experiences with vampire attacks on Opensea and Uniswap, respectively, highlight the challenges of aligning token incentives with network utility.

Linking Token Incentives to Network Utility:

To address the problem of misaligned incentives, it is crucial to link token incentives to network utility. Users should only receive token incentives if they contribute value to the network through specific, desirable actions, rather than simply adopting the network. By aligning incentives with utility, networks can ensure that users actively participate and engage, similar to active web2 networks like Roblox. This approach requires careful consideration of the network being built and how token incentives interact with its utility.

The Role of Optimism in Bootstrapping Web3 Networks:

Optimism plays a vital role in driving innovation and advancement in the realm of Web3 networks. Failure, blunders, and disasters serve as learning opportunities, pushing individuals and communities to find solutions and improve. Evolution teaches by destroying what doesn't work, and the excess energy released from setbacks fuels innovation. As Nassim Taleb suggests, innovation thrives in environments where there is enough stress to push people into problem-solving mode.

The Power of Envy and Competition:

Charlie Munger's statement, "The world is not driven by greed; it's driven by envy," sheds light on the role of competition in pushing the boundaries of innovation. When someone accomplishes a new feat, it sparks a sense of possibility and motivation in others. This envy drives individuals and communities to aim higher and build upon the achievements of their predecessors. The cycle of innovation and advancement compounds, raising the bar for future generations.

Actionable Advice:

  • 1. Prioritize underserved users: When bootstrapping a network, focus on the most underserved users who feel the problem deeply. These users are more likely to contribute value to the network and drive its growth.
  • 2. Align incentives with utility: Link token incentives to specific, desirable actions that add value to the network. This ensures that users are motivated to actively participate and engage, rather than solely seeking financial rewards.
  • 3. Embrace failure and learn from setbacks: Recognize that failure and setbacks are essential for progress. Encourage a culture of learning and problem-solving to drive innovation and advancement within the network.

Conclusion:

Token incentives can be a powerful tool in bootstrapping Web3 networks, but they come with limitations. By understanding the importance of active participation, the challenges of aligning incentives with utility, and the role of optimism in driving innovation, we can strike a balance between token incentives and optimism. Building networks that prioritize underserved users, align incentives with utility, and embrace failure as a learning opportunity will pave the way for the successful bootstrapping of Web3 networks.

Resource:

  1. "Bootstrapping Web3 Networks: The Limitations of Token Incentives", https://breadcrumb.vc/bootstrapping-web3-networks-the-limitations-of-token-incentives-4b57fa54486c (Glasp)
  2. "Justifying Optimism", https://collabfund.com/blog/justifying-optimism/ (Glasp)

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