Bootstrapping Web3 Networks: The Limitations of Token Incentives and What We Look for in Founders

Bootstrapping Web3 Networks: The Limitations of Token Incentives and What We Look for in Founders

In the world of startups and decentralized networks, token incentives have gained significant attention as a means to bootstrap and grow networks. However, it is important to understand both the limitations of token incentives and the qualities that make founders successful in this space.

Passive Participation: When Token Incentives Work

There are examples of networks that have successfully leveraged token incentives to encourage passive participation from users. Helium, for instance, is a decentralized network that provides internet access to IoT devices "in the wild." By allowing users to passively participate in the network and benefit financially from their involvement, Helium has been able to increase the utility of the network.

Similarly, Arweave and Compound also rely on passive participation from users. Arweave is a decentralized storage network that ensures censorship resistance, while Compound is a lending network where lenders deposit their crypto assets into a lending pool for borrowers to access. In both cases, users on the supply-side of the network passively engage and benefit from financial incentives.

Active Participation: The Limits of Token Incentives

While passive participation has its merits, it is not always the most effective approach. One of the key principles of bootstrapping a network is to target the most underserved users. However, token incentives can attract the wrong type of users, those solely motivated by financial gains rather than the utility of the network itself.

When there is a disconnect between financial incentives and network utility, the network may experience rapid initial growth followed by a decline. This was evident in the case of Looksrare, which executed a "vampire attack" on Opensea by airdropping LOOKS tokens to high volume Opensea users. Despite the initial growth, user behaviors driven by financial incentives led to a collapse in genuine trade volumes.

A similar trajectory was observed with Sushiswap's vampire attack on Uniswap, albeit with some governance issues. These examples highlight the importance of active participation and engagement from users to ensure the long-term success of a network.

Linking Token Incentives to Network Utility

To address the limitations of token incentives, it is crucial to link them to network utility. Token rewards should be restricted to specific, desirable actions that add value to the network, rather than merely promoting adoption. This ensures that users are incentivized to actively participate and contribute to the growth of the network.

What We Look for in Founders

In the startup world, the qualities of founders play a significant role in determining the success of a venture. While intelligence is important, determination is paramount. Startups face numerous obstacles, and founders must possess the resilience to overcome them without getting demoralized easily.

Imagination is also a key quality in successful founders. The ability to come up with surprising new ideas, even if they initially seem bad, is crucial in the unpredictable startup landscape. The most successful founders often have a piratical gleam in their eye, breaking rules that don't matter while staying true to their vision.

Furthermore, starting a startup with just one founder can be challenging. Empirically, most big successes have two or three founders who share a strong relationship. Genuine liking and effective collaboration among founders are essential for navigating the startup journey and resolving any conflicts that may arise.

Actionable Advice:

1. Focus on network utility: When building a decentralized network, ensure that token incentives align with the value users bring to the network. Rewards should be tied to specific actions that contribute to the network's growth and utility.

2. Embrace determination: As a founder, cultivate the determination to navigate obstacles and setbacks without losing motivation. The startup journey is unpredictable, and the ability to modify dreams on the fly is crucial for success.

3. Foster strong founder relationships: If you have the opportunity to build a startup with multiple founders, prioritize genuine liking and effective collaboration. A strong founder relationship lays the foundation for successful decision-making and problem-solving.

In conclusion, token incentives can be a powerful tool for bootstrapping and growing decentralized networks. However, it is essential to understand their limitations, particularly in terms of passive versus active participation. By linking token incentives to network utility and embodying the qualities of determination and imagination, founders can increase their chances of success in the startup ecosystem.