May 2023

Key Insights for this month in Digital Assets : Revisiting Token Incentive Programs

Revisiting Token Incentive Programs

Tale of John Law – Printing Money to Attract Trade

We shall start this piece with a mini history anecdote – the story of the French colonizers and their economic experiment, specifically of one man – John Law. In the early 18th century the economy of France was depressed. The government was deeply in debt and taxes were high. In addition, the French controlled the colony of Louisiana, a vast settlement in the interior of North America.

John Law was a Scottish economist and banker and visionary – he believed that paper money could help him achieve a strong business and economy.

Law saw an opportunity to turn the untapped territory in the New World called Louisiana into a profitable venture, so he founded the Mississippi Company in 1717 for trading with North America.

However, he was struggling to attract investors, and its stock price was low, and Law came up with a plan to issue paper money. Law convinced the French government to allow him to issue paper money that he further used to purchase shares in the Mississippi Company.

This caused the value of the company’s stock to skyrocket and so did Law’s net worth. Law leveraged issued more shares to attract trade, establish a mint to produce freshly minted coins and used these to invest in other ventures like the French East India Company, real estate and manufacturing.

With the influx of paper money and the booming economy, France became a hub of prosperity and wealth and attracted investors from far and beyond. Law’s vision had come to fruition, and he had built a strong business and economy using the power of paper money.

Growth Hacking in Web3

Web3 ecosystems employ the same tactic of John Law to growth hack their way into more user activity deploying millions of dollars to incentivize/reward users. Let’s explore the multiple ways that different ecosystems have employed this in the last bull market.


One of the most sought-after events for users of on-chain projects. Pioneered early on by Uniswap and recently by Arbitrum, Airdrops have been extensively used in the past 2 years to reward various stakeholders of the ecosystem. Airdrops reward loyal users, and increase the user stickiness of the product but importantly, the promise of an airdrop can end up attracting healthy user activity.

The first ever airdrop was way back in 2014 when “Iceland’s Bitcoin”, Auroracoin, was airdropped to the country’s citizens. In a sign of things to come, $AUR pumped soon after launch to $61 before dumping dramatically and staying there. It’s currently sitting at a little over 3 cents.

Since then there have been many airdrops, with mixed results.

Although this section, deserves its own separate article, we wanted to highlight airdrops are one of the most crucial elements of user incentives that ecosystems can employ (along with protocol incentives).

OP TVL post airdrop.

We also have to realize the expectations from airdrops have been increasing over time as more and more projects do it and adjust to narrative accordingly. Executing a good airdrop can be hard, results can be short-lived and importantly, you can only do it once.

A popular Dune board does a detailed analysis on the Uniswap airdrop that I highly recommend.

Incentive programs with ecosystems tokens

Probably the most successful way to bootstrap an ecosystem is through protocol incentives, similar to how our old friend Jon Law would do it. Liquidity Incentives can create an effective positive feedback loop if done the right way. The best tool we have today is hindsight.

Let’s explore some ecosystems and their incentive strategies:


A scaling solution for Ethereum, Polygon had a bigger plan than its peers. Polygon’s road to success began in April 2021 with a huge $40mn liquidity incentive program in partnership with Aave. 1% of the total supply of MATIC was deployed for this program (Worth ~$300mn at peak). With this, Polygon didn’t only bring one of the largest DeFi projects to its PoS chain but also massive user liquidity. As a result Polygon instantly shone into the limelight.

The program was extremely effective and well received by the community. It led to a quick bump in TVL, price appreciation and sustained user demand.


Modeled after the early success of Polygon’s incentive program Avalanche announced Avalanche Rush – a massive $180mn program to bring in blue-chip DeFi protocols and also support the native AVAX DeFi ecosystem.

During the event, users were incentivized to participate in various activities such as liquidity mining, staking, and trading on the Avalanche network in exchange for rewards in AVAX tokens.

The AVAX Rush event was designed to create awareness and encourage adoption of the Avalanche network that came with high tx speeds & low fees. It was also meant to attract new users and investors to the Avalanche ecosystem.

Overall, the AVAX Rush event was a successful marketing campaign that helped to increase the visibility and adoption of the Avalanche ecosystem.


2 weeks following the Avalanche Rush announcement, Fantom launched a similar program inviting DeFi projects to build on the chain and offer supercharged incentives. Contrary to the above two, the Fantom incentive program was targeted towards builders who were expected to pass it on to the users. It was also open to all builders as long as they match certain quantitative criteria.

Although the Fantom announcement was very well received by the community and market resulting in a 500% rally leading up to the announcement and further 100% the day after, it was very short-lived.

In fact here is the Fantom program against Avalanche (and lesser-known Celo).

  • So why did we Fantom’s incentive program seemingly fail compared to its competitors even though the size of the program was larger and around the same time. We have compiled some qualitative and quantitative explanations to help us figure out.
  1. TVL Dominance
    Both Polygon and Avalanche’s incentive program was concentrated with the top protocols whereas Fantom was highly fragmented. Polygon committed the entirety of $40m to Aave which represented 50-75% of TVL over the course of the program, while Avalanche distributed its $180m amongst the top protocols – Benqi, Aave, Curve, Traders Joe which is reflected in TVL dominance as well. This helped them get concentrated liquidity to select protocols which in turn led to price appreciation of native tokens leading to further fuel for incentives.
  1. In fact, Fantom’s incentive program was available to any project that passed a threshold TVL. This led to projects competing against each other to qualify for the incentives which further led to these rewards being thinly distributed. Moreover, these also attracted mercenary capital.

Source: Blog

AMMs and Lending Markets: The most successful liquidity incentives are run on AMMs and Lending markets. These protocols have proven product market fit, have a secure framework based on the success of their peers on Ethereum, and their success helps build the ecosystem.

  1. Duration
    Similar to protocol distribution, the time distribution of the rewards is also a major factor. While its peers ran a concentrated program of 6-8 weeks, Fantom decided to distribute FTM tokens were vested over 12 months and 2 month cliff. This resulted in lower FTM yields at scale forcing native projects had to reward their tokens at a much higher pace to compete with yields on other chains. Quickly exhausting LM arsenal of low liquidity tokens is definitely a bad strategy and hence the ecosystem suffered.
  1. User Incentives and user incentives only
    MATIC incentives were exclusively for Aave lending and borrowing incentives to attract user liquidity while AVAX experimented with Liquidity Mining with only AVAX tokens but over time developed a strategy to requiring projects to distribute both native project tokens along with AVAX. We can notice this especially as the later integrations like Sushi that required protocols to distribute rewards in a 50/50 split.
    Meanwhile, FTM tokens allocated for this program was given out to projects right away – no questions asked as long as they maintained the TVL. However, as history has proven, trickle-down economics does not work.

Source: Blog

  1. Predictability
    Although a bit counter intuitive, the less predictive the incentive strategy the more effective the program as it creates an environment of hope. By laying all its cards on the table Fantom may have had a slight disadvantage compared to its peers who fueled ‘hopium’

Source: Blog

  1. User experience
    Although not firmly a component of token incentive model but important nevertheless, I believe Fantom rushed to launch the program without stress-testing the chain and fixing UX on the protocols. FTM bridge had a super unpleasant experience with. In fact, at times the bridge was halted for hours while transactions were stuck for days at a time.

Above is a screenshot of a transaction from yours truly stuck for 5 days in the Anyswap bridge

Eventually, the success of an ecosystem and its liquidity mining incentives are dependent on dozens of factors, but hopefully we could learn from the past.

Optimism – Combination of Airdrop and LM

Learning from the efforts and missteps of past ecosystems, Optimism decided to combine all and launch a joined Airdrop and Liquidity Incentive program. While the airdrop was given to retail users, the OP rewards ensured continued incentivized usage.

Although the long term impact of this program is TBD, as we recall from the TVL chart as well, Optimism has been fairly successful in creating an initial spike in user demand with airdrop and continue the incentivized usage with OP rewards.

John Law’s Mississippi Company may have ultimately ended in disaster, but the legacy of his innovative ideas lives on. The liquidity incentive programs are just a few examples of how the crypto community is actively experimenting with new ways to incentivize participation and create value. As we move forward, let’s take inspiration from the past, and do better in the future.

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