Redefining Token Rewards for Sustainable Web3 Economies

Decentralized finance (DeFi) is constantly evolving, and finding effective user incentivization strategies has proven challenging. DeFi projects have explored various mechanisms to attract and retain users. Although these models have been innovative, they often lack sustainability and struggle with long-term user engagement due to conflicting priorities of immediate rewards versus the overall well-being of the protocol in the long run.

This article introduces a framework for sustainable incentivization for Web3 projects. Drawing inspiration from game theory and behavioral economic principles, this framework aims to balance incentivizing active participation and fostering long-term commitment. By creating a more equitable and sustainable model, we plan to chart a new course for user incentivization in the tokenomics landscape.

For a good survey on incentivization strategies and their shortcomings, the “birth of twAML” by TapiocaDAO provides an excellent summary.

The Contribution Scoring Framework (CSF)

In this framework, users are assigned a score based on their individual contributions to the project’s key performance indicators (KPIs). A high score grants users several benefits, including a larger share of profits, increased voting power, and access to protocol-specific perks such as merchandise and special events. The duration of each epoch is randomized to prevent manipulation of user scores.

One of the critical characteristics of the CSF is that it does not offer any token rewards to users, either directly or indirectly. This eliminates imminent and future sell pressure and creates a competitive environment for protocol profits which benefits the protocol in the long run. Protocols adopting CSF could create a leaderboard or ranking system to track user performance and encourage competition.

For a DeFi project, an exemplary CSF equation could consist of three factors:

• The average magnitude of user liquidity (L)
• The protocol revenues (R) generated through that liquidity.
• The number of accumulated veTOKENs (V).

The resulting score equation S, for user i, for the epoch T, is calculated as follows:

where the weights are dynamic, and their sum equals 1

and

are the total locked liquidity, total revenues, and the total veTOKEN supply at time t, respectively.

CSF is extensible and flexible. Protocol developers can define new KPIs and integrate them easily into the CSF. Non-financial contributions could also be added to the CSF. Users who contribute to the project’s development, participate in governance decisions, or promote the project on social media could also be rewarded with score boosts.

We recommend employing an individual, progressive pricing model where the cost of veTOKENs increases as a user buys more. This would incentivize users to stake more TOKEN to naturally boost their veTOKEN sum and encourages a more equitable distribution of voting power and profit share while also still enabling late-comers to catch up by making bulk veTOKEN purchases.

Like other protocols, unstaking TOKEN resets the veTOKEN count, providing a strong disincentive for users to withdraw their tokens. The proceedings of veTOKEN sales can be used to create protocol-owned liquidity to minimize the effects of external market conditions.

Dynamic weights may, however, introduce some unpredictability regarding rewards, so it is essential to thoroughly test these algorithms using simulations before implementing them. Also, it is worth considering that an overly aggressive progressive veTOKEN pricing model could potentially drive away larger investors, so it is vital to balance profitability and accessibility.

In conclusion, the proposed Contribution Scoring Framework offers a new perspective on incentivizing users in Web3 projects. It puts the “real yield” at the root of the incentivization framework and creates a fair, dynamic, and sustainable environment. Although specific challenges may arise, they can be dealt with using meticulous preparation, openness, and adjusting to user input and market trends.

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Disclaimer: This article is for informational purposes only and should not be considered financial or investment advice. Always do your own research and consult with a professional before making any financial decisions.