Efficacy of Point Systems

Crypto points are the web3 version of traditional credit card rewards. The more you use a project (spending quota on your credit card), the more points (cashback, loyalty points) you get. However, the exchange rate or actual value of these points is dependent on the team setting the actual rules of the game. Players engage in this implicit game with their capital on the line and the expectation that they are rewarded with a future airdrop, helping to boost the project’s metrics in the process. This component of trust might quickly become predatory, subtly farming players and creating zero-sum games. At best, farmers might be happy with their airdrop allocation and be converted into actual organic users of the protocol. At worst, unsatisfactory distributions might cause the farmers to abandon in search of greener pastures, dumping the project’s token in the process.

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Key Takeaways

  • The current crypto cycle has seen a significant rise in the use of Point Systems – the ICOs of this cycle, but where you don’t have to pay and can be compensated with “free money” in exchange for boosting a project’s metrics.
  • Point systems serve as great ways to bootstrap the initial liquidity and user base of a project, offering users an arbitrary “yield” – implicitly sending the message that your efforts are being tracked and you will be rewarded for having skin in the game.
  • Indirectly, points introduced speculative elements by being associated with a tangible value on OTC and secondary pre-launch markets.
  • Most point systems result in users prioritizing short-term gains over long-term usage of the project, also damaging the project’s future outlook, as they are rewarding users who are not aligned with their success
  • Points trading has become a secondary PVP market – users should be aware of this narrative shift and try to uncover the underlying incentives of all parties involved. This will help determine whether or not a project is worth farming.

The Psychology Behind Points

Point systems are common in both consumer and digital economies, capitalizing profoundly on human psychological biases. These systems aren’t just about reward accumulation, but also about tapping into the natural responses that govern much of our decision-making.

The appeal of point systems, whether in the context of crypto or credit card rewards, largely capitalizes on the psychological principle of instant gratification. This concept describes our innate desire for immediate rewards, a trait that has evolutionary roots in survival instincts but has been adapted in modern contexts to drive consumer behavior. Instant gratification is particularly powerful in today’s fast-paced world, where the delay between desire and fulfillment is increasingly expected to be minimal.

Some people began to consider whether games could be used to make people do other things. In the Seventies, the American management consultant Charles

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Source: Gurwinder Blog, Why Everything is Becoming a Game

Credit card points display this psychological principle effectively. When consumers make a purchase with a credit card that offers points or cash back, they receive immediate reinforcement in the form of points added to their account. This provides a quick dopamine rush and reinforces the behavior of using the credit card for more purchases, thereby increasing consumer loyalty and spending frequency. The immediacy of this reward contrasts sharply with more traditional financial benefits, such as savings, which accrue and are realized over a longer period.

Beyond instant gratification, point systems also tap into primary and conditioned reinforcers, which are concepts popularized by psychologist B.F. Skinner. In his experiments, Skinner identified primary reinforcers as immediate needs like food and water, which are innately satisfying. Conditioned reinforcers, or secondary reinforcers, do not satisfy direct biological needs but come to be desired through their association with primary reinforcers. In the context of point systems, the points themselves are conditioned reinforcers—they are not inherently valuable, but they become valuable through their association with future tokens that will have an explicit monetary value later on.

Even though Blur pioneered this method and was later followed by FriendTech, it wasn’t until recently that many  projects have started launching point systems all at once. The idea is to track user participation in the early stages of their projects, sending a signal that their efforts are being recognized and are highly likely to be rewarded later on.

Even though these points live off-chain and hold no intrinsic value, they are coveted because they come with the expectation of an airdrop (ie. money) –  which is a primary reinforcer. Over time, the accumulation of these points becomes a goal in itself, driven by instant gratification in the form of a tangible “reward”, and its value arbitrarily assigned through speculation on pre-listing markets like Whales Market.

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Source: Whales Market

Crypto’s New Form of Yield

Yes, this title was very specifically worded this way.

If you read it from a project’s perspective, point systems offer a strategic tool to engage users more deeply. By offering points as a reward for various on-chain activities—ranging from liquidity provision to simple transactions or governance participation—projects can guide the behavior of their users, letting them know that actions they will appreciate the most (supply liquidity, looping to get leverage, using the app very frequently, etc).

However, point systems can sometimes be predatory and used to farm users – inverting the roles and using their time and monetary resources to inflate specific metrics or obtain certain numbers. In doing so, since project teams are the ones who determine the actual point-token exchange rate, they might as well change the rules of the game, for example by not announcing a fixed TGE date, not being transparent about the actual distribution of rewards, launching one season after the other, etc.

Meanwhile, from a user’s perspective, points are essentially a new form of yield. It’s a reward issued by protocols to reward users for the actions they take on their platform activities (LPing, staking, etc.). This is an extra reward that is added on top of the actual real yield that comes from interest payments or fees.  This can help them to compete against similar projects who have already issued their tokens. Think of it as a Pool2 farm but without emissions as these points are not tokens that can be dumped on the open market.  Even if a token is distributing actual token emissions in the form of ERC20s, points are still more attractive for users, as there is a surprise and speculative factor around how much the points will be worth in the future.

This new form of yield can be valued by using estimates based on point valuations on secondary pre-listing markets like Whales Market, which act like prediction markets and let participants express their opinion of a protocol’s valuation before their token goes live. The caveat here is that OTC markets and pre-launch perps listings are often highly illiquid, which is a limiting factor for price execution and achieving a certain level of price discovery that converges with the actual price of the token at launch. While pre-launch markets might be effective for tokens that trade at multi-billion valuations (like $JUP, $ZRO, $W, etc), they are not that effective for smaller projects ($KMNO, $PRCL, etc.).

The Benefits of Point Systems

Points systems in crypto projects offer several compelling benefits, such as enhancing user engagement and educating users. This serves as a great way to bootstrap initial liquidity and traction of a project, as well as to drive user retention later on, for example distributing ownership of the protocol and encouraging governance participation.

Increased User Engagement and Retention

Point systems incentivize users to engage more deeply with the platform through activities like trading, staking, and participation in governance. By rewarding these actions with points, users are motivated to perform them more frequently. This not only boosts daily active use but also enhances long-term user retention as individuals continue participating to accrue more benefits.

When Blur first launched to compete with Opensea, people simply did not have an incentive to switch to a new NFT trading platform. X2Y2 tried doing so by offering an airdrop to users who listed NFTs on their platform, but this did not last very long. When Blur’s point system came out, people had a new incentive to start bidding and listing NFTs there. Volumes on Blur did not overtake OpenSea yet during the first season of points. But as soon as $BLUR rewards got distributed and people reportedly received over 6 figures worth in airdrops, crowds started flocking over to farm Season 2 of Blur points. Later on, we would see Blur season 3 and the launch of Blast and Blast points, which would serve as the core retention strategy for Blur.

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Source: Blur vs Opensea by Hildobby

Speculative Appeal and Value Creation

Points add a layer of speculative appeal to a project by providing users with potential future benefits that might accrue value. For instance, points that can be converted into tokens or have certain utilities within the ecosystem can attract new users who are interested not just in the project’s current offerings but also in the potential economic returns from accumulating points. This speculative aspect can drive initial user interest and capital inflow, which are critical in the early stages of a project’s development.

The ability to treat points like yield also saw projects like Pendle introduce Point markets for users to leverage farm points, and new projects like Airpuff spawned entirely out of the opportunity of point markets.

Platforms like Whales Market facilitate the trading of points before they are officially converted into tokens, providing early liquidity and price discovery. This early market activity can help stabilize prices post-official release and reduce volatility due to sudden market entries. Though arguably, with pre-listing markets now effectively pricing in the value of a project before it even launches, it could lead to prices bleeding down immediately upon launch.

The Drawbacks of Point Systems

Short-Termism and Misaligned Incentive

Point systems often encourage behavior focused solely on earning rewards rather than fostering genuine interest or loyalty to the product. During the phase where points are being accumulated, many users engage with the project not because they find the product valuable or effective but because they stand to gain economically from the rewards offered. This creates a user base that is transient and primarily motivated by potential profits rather than a commitment to the platform’s long-term success or utility.

Here is Parcl’s TVL before and after the Points programme.

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Source: DefiLlama

Here is Marginfi’s TVL right after Jito’s wealth-creating point program, people flocked to Marginfi to farm their points too. But after the CEO announced there will be no TGE soon, and left, TVL plummeted.

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Source: DefiLlama

Speculative Bubbles and Volatility

While the creation of secondary markets for points allows for early price discovery and can add liquidity, it also introduces significant risks. The valuation of points in these markets can lead to early speculative bubbles where the price of points is driven more by market sentiment and speculative trading than by the underlying value or success of the project.

In the case of a project where points are actively traded on secondary markets before the official token launch, the initial excitement and speculation create artificial price discovery, which may drive the point prices to unsustainable levels. When the token is finally launched and becomes tradeable on mainstream exchanges, there might be an immediate sell-off as early holders of points (or tokens) cash out at what they perceive as peak prices. This can cause the token price to plummet shortly after launch, harming late entrants and shaking confidence in the project’s stability and potential for long-term success.

For example, Portal was valued at $3/token on Whales Market prior to its listing.

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Source: Whales Market

Once the token went live and became tradeable, the price has bled by over 70% to $0.76.

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Source: Coingecko

System Gaming and Sybiling

Most Point Systems have created a transparent and predictable manner in how rewards are distributed, which makes it highly susceptible to gaming, particularly through Sybil attacks. In these scenarios, individuals exploit the system by creating multiple accounts or identities to maximize point earnings. This not only undermines the fairness of the distribution mechanism but also skews the project’s metrics, giving a false impression of wider engagement or support.

The economic benefit for users to Sybil projects is very high given that many projects distribute their tokens on a non-linear basis, as we’ve seen with Tensor, Jupiter, or Jito (even with Sybil measures in place, it’s not 100% foolproof).

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Source: CC2Ventures

Conclusion

Point Systems are a double-edged sword. On the one hand it can provide great benefits to both users and projects in a positive-sum manner. For this to be achieved, point systems must be designed with transparency, fairness, and a focus on real utility and value creation. These systems can enhance user engagement, foster a sense of community, and support the bootstrapping of new projects by incentivizing participation through meaningful rewards. When well-implemented, point systems can facilitate a healthy economic environment where both parties—users and developers—gain mutual benefits that contribute to the project’s sustainability and growth.

The most successful use of points coincides with the first implementation, which is Blur. Since the initial campaign it has managed to retain and grow an organic user base across all 3 seasons of Blur points. Nobody was doing points back then, so farmers had no playbook and other projects had not caught up to the benefits of points yet. A large part of their success is also attributed to the $BLUR distribution, which makes up 51% of total supply, ultimately creating a positive flywheel that rewards users throughout each season of points and attracting more users.

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Source: DefiLlama

However,  many projects that later adopted point systems have not aimed to foster symbiotic relationships, but rather have created environments that resemble negative-sum games. These systems are primarily designed to extract maximum value from users, capitalizing on their engagement without providing equivalent long-term value. This can come in the form of:

  • Farming users through fees from protocol interactions (sometimes even distributing points based on how much fees were spent).
  • Speculating about an airdrop on social media to bait users.
  • Delaying or not providing an end date for the points program, which effectively time-rugs users by making them farm the protocol (or get farmed) over a long period of time.

Such approaches lead to speculative bubbles, where the initial excitement and inflated valuations are not supported by underlying fundamentals. When the speculative hype dissipates, users find themselves with devalued points and tokens, having contributed significantly to the platform without adequate returns. This pattern not only harms individual participants but can also undermine trust in the broader crypto ecosystem, deterring future engagement and investment.

Hayden Adams’ Thoughts on Points

Hayden Adams, Founder of Uniswap, has spoken out regarding points systems, highlighting the pitfalls of existing point systems and key principles that crypto projects should adhere to for ethical and sustainable implementation of token distributions:

Clear Differentiation: He emphasizes the importance of issuing tokens rather than ambiguous “points,” advocating for tangible assets with defined rights and utilities rather than abstract scoring systems.

Transparency and Honesty: Adams stresses that projects should avoid creating hype or speculation around token distributions. Projects should only publicize details when they have concrete information to share, avoiding teasers or vague promises that can mislead or manipulate market expectations.

Fair and Accessible Liquidity: He argues for the need to ensure real liquidity from day one of a token’s launch. This involves distributing a sufficient number of tokens to facilitate genuine price discovery without reliance on exchanges or market makers. He believes that projects should enable easy access to tokens to avoid manipulative practices like low float scenarios, which can lead to market manipulation.

Reasonable Token Supply: Adams is critical of projects that create absurdly high token supplies to exploit unit bias, where users think they are getting more value due to the larger number of tokens they receive. He views this as a form of bad practice that misleads participants.

Generous Distribution: He advocates for the generous distribution of tokens to the community, arguing that if a project does not believe its community deserves a significant share, it probably shouldn’t be launching a token at all.

Avoiding Price Speculation: Projects should not market potential price gains or have influencers speculate about the token’s future value. Focusing on these price can detract from the project’s fundamental value and goals.

Simplicity and Thoughtfulness: Adams calls for simplicity in token distribution plans and for project leaders to put careful thought into their decisions regarding tokenomics. This can help in avoiding later conflicts and ensures that the project can stand behind its decisions with confidence.

Integrity and Pride: Finally, he believes that project leaders should make decisions that they can be proud of, avoiding choices that might lead to regret or necessitate apologies to the community later.

Are Points Here to Stay?

As more projects start adopting points as their go-to-market strategy, there is a risk that the market becomes too saturated with such programs. Ultimately, capital and attention will get diluted and there will simply be not enough liquidity to support the farming across all these platforms. Users begin to experience “incentive fatigue,” where the appeal of chasing the highest yields diminishes because of the sheer volume of options, leading to less effective point systems.

Does this mean projects should ditch points? Probably not. But the criteria required for users to deem a project “valuable to farm” would play a very big part in whether point systems work.

Just as in traditional capitalist markets, capital tends to aggregate around opportunities perceived as having the best risk-reward ratio. For point systems, this means that projects with:

  • Credible teams and transparent operations,
  • Clear utility and use cases for their tokens or points,
  • Strong community and backing (possibly from well-known investors or having a significant user base),
  • And a good product (Users are more inclined to invest their time and resources in projects whose products they value and use beyond the speculative aspects of point farming),

are likely to attract more capital and engagement. These factors lower the perceived risk and heighten the potential rewards, drawing more users and investors.

While point systems are likely to remain a staple in the toolkit for projects to bootstrap user engagement and liquidity, their long-term viability will depend on the ability of projects to offer more than just attractive paper returns. Those that combine sound economic models, real utility, and robust product offerings are better positioned to overcome market saturation and dilution.

References

Disclosures

Revelo Intel does not have a commercial relationship with any of the projects mentioned in this report. This report was not paid for or commissioned in any way.

Members of the Revelo Intel team, including those directly involved in the analysis above, may have positions in the tokens/projects discussed.

This content is provided for educational purposes only and does not constitute financial or investment advice. You should do your own research and only invest what you can afford to lose. Revelo Intel is a research platform and not an investment or financial advisor.