Variant联创 From PoW, ICO and airdrop to progressive ownership token distribution

Evolution of Variant联创 From PoW, ICO and Airdrop to Progressive Token Distribution for Ownership

Authors: Li Jin & Jesse Walden, Co-founders of Variant; Translation: LianGuaixiaozou

The theory behind Variant, which we founded, is that the next generation internet will transform users into owners through tokenization. Using tokens as user incentives has proven to be highly effective in bootstrapping infrastructure networks like Bitcoin and Ethereum. However, there hasn’t been a proven model for tokenizing and scaling application-layer networks. Instead, there are many examples showing that token distribution actually hinders sustained growth and retention, as it attracts more speculators than genuine users, blurring product-market fit.

These failures have led many to believe that token usage in applications is inherently flawed, but we don’t think so. We believe the way forward is to iteratively design tokens towards a more bottom-up and opt-in ownership model, which we call “progressive ownership.” The emphasis of this approach is to make users more loyal to applications that have product-market fit.

Within this framework, we will summarize the past eras of token distribution mechanisms – PoW mining, ICOs, and airdrops – along with the major lessons and problems associated with each. We will then present high-level measures and strategies for a new token distribution model that we believe can sustain the early product-market fit of applications. By employing this strategy, applications can leverage user ownership to deepen the loyalty of existing users and pave the way for further user growth and retention.

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1. The Three Eras of Token Distribution

Cryptocurrencies have gone through three major eras in terms of token distribution:

• PoW (Proof of Work) Era (2009-present): Formation of hardware

• ICO (Initial Coin Offering) Era (2014-2018): Formation of capital

• Airdrop Era (2020-2023): User onboarding

Each era has expanded access and lowered barriers to entry, naturally leading to new waves of growth and development.

(1) PoW Era (2009-present)

Bitcoin introduced the concept that anyone willing to run software (“mining”) on their own machine could operate a permissionless network and earn tokens representing ownership of the network. Miners who invest more computing power have a greater chance of receiving rewards, which has led to the rise of specialization and significant investment in computational resources.

The PoW era signifies that token incentives can effectively drive supply in a network where value contribution can be quantified. The key difference between capital assets (hardware) and financial assets (BTC) is that miners have to sell their financial assets to cover the cost of capital assets. As specialized hardware becomes an essential cost, miners have to invest more in the game, leading to the exclusion of ordinary users.

(2) ICO Era (2014-2018)

The ICO (Initial Coin Offering) era marked a departure from the PoW token distribution model. Projects raised funds and distributed tokens by selling them directly to potential users. In theory, this method allowed projects to bypass intermediaries such as venture capitalists and banks, reaching a broader range of participants who could share in the benefits of the products and services they would use.

This model attracted entrepreneurs and investors, sparking a wave of speculation. Ethereum partially kickstarted the ICO trend in 2014, setting the blueprint for numerous projects in the following years, including major ICOs like EOS and Bancor in 2017-2018. However, the ICO era was plagued by fraud and lack of accountability. The failures of many ICO projects, coupled with strict regulatory scrutiny, led to the rapid decline of this era.

ICOs highlighted blockchain’s ability to form global capital without permission. However, it also emphasized the need for more thoughtful token design and distribution models that prioritize community coordination and long-term development rather than just capital supply.

(3) Airdrop Era (2020-2023)

In 2018, a U.S. Securities and Exchange Commission (SEC) official stated that BTC and ETH were not securities because they were “sufficiently decentralized”. As a response, many projects designed tokens with governance rights and widely distributed them to users retroactively in order to achieve full decentralization.

Unlike ICOs where tokens were distributed through monetary investment, airdrops reward users based on their historical usage. This model kicked off the “DeFi summer” in 2020, popularizing liquidity mining (providing liquidity in financial markets to earn tokens) and yield farming (selling earned tokens for short-term profits).

Although airdrops represent a shift towards ownership distribution models that are more user-centric and community-driven, users often don’t need to invest, and most airdrops result in users immediately selling the majority of the received tokens, converting ownership into profits.

Many projects have used airdrops before establishing a real product-market fit. Tokens attracted bots and speculative users driven by incentives, without giving ownership to those who aligned with the project’s long-term success. The frenzy of grabbing airdrops and selling tokens has blurred the signals of product-market fit, leading to price booms and crashes.

Some projects that hastily launched tokens also saw their founding teams taking a step back, attempting to adhere to an ambiguous fully decentralized regulatory milestone. This leaves the decision-making to governance voting, which most token holders don’t have the time or background knowledge to fully understand. Projects need founders to continue rapid iteration before and even after the product fits the market’s needs. In practice, airdrops often prove incompatible with growth strategies and institutional execution within startups.

We believe that the main lesson from the era of airdrops is that the pursuit of full decentralization has led many projects away from product-market fit. Instead, after early product-market fit has been validated, token distribution should be more thoughtfully inclined towards advanced users.

2. A New Token Distribution Framework: Progressive Ownership

Progressive ownership is built upon progressive decentralization, indicating that tokens cannot substitute for product-market fit. This approach uses economic incentives to some extent to increase user loyalty and retention, progressively strengthening user ownership. In this model, users are incentivized with profit sharing (e.g., ETH or stablecoins), but they can also choose to convert personal income into ownership tokens representing a proportion of community income shares.

This is beneficial for users as they can flow between income and ownership with fewer steps than before when converting tokens into income was the default operation. Progressive ownership also allows them to adjust their economic participation to a risk and involvement level that suits their own circumstances.

There are also benefits for builders, who can leverage profit-sharing incentives to drive growth, build loyalty, retain control, and iterate quickly without being distracted by the goal of full decentralization. Additionally, founders can still strive for liquidity through tokens while attempting to mitigate risks associated with broad distributions without targeting.

Progressive ownership only applies to projects with early product-market fit and profit sharing. Although the revenue scale of most crypto projects is relatively small at the moment, there are increasing projects that meet this criterion. So far this year, Optimisim has generated approximately $30 million in revenue. In October, MakerDAO earned $16 million in fees from the protocol, with a monthly average revenue growth of 25% over the past year. Ethereum Name Service (ENS) made $1.1 million in revenue in the past month.

Progressive ownership shifts the token distribution from an opt-out to an opt-in model, where users have more vested interest. This model has the potential to promote stronger loyalty and network effects. When loyal users become owners, their interests are aligned with the success of the network, motivating them to encourage others to join and creating a virtuous cycle of growth. Users or developers who choose ownership are more likely to maintain long-term relationships with the project, similar to startup employees who have stock options.

On the contrary, in the airdrop model, loyalty may be eroded as most users choose to sell tokens for profit, causing downward pressure on prices. Studies have shown that when customers as stakeholders suffer losses, their satisfaction and loyalty to the company decrease. By opting for an ownership model, networks can mitigate these boom and bust cycles and the erosion of user interests that come with them.

3. Progressive Ownership

Progressive ownership involves three steps:

• Building a product that meets user needs.

• Using on-chain revenue sharing models to drive growth, retention, and defensibility.

• Allowing advanced users to upgrade to ownership (e.g., converting revenue into tokens).

(1) Building a product that meets user needs

This is the most challenging step. The foundation of the progressive ownership model begins with developing products and services that serve users in novel ways. As Li recently wrote, “Successful startups present a stair-step of improvements in helping people realize their core needs.”

By meeting these needs, whether it’s financial or emotional, applications can find product-market fit and even foster psychological ownership.

(2) Using on-chain revenue sharing models to drive growth, retention, and defensibility

Projects can adopt on-chain revenue sharing models that allow users to share in the success of the product/service, deepening their interest and commitment.

A prime example is Zora’s protocol rewards, which distribute a portion of revenue to creators and developers driving NFT minting. This approach not only incentivizes user retention but also enhances defensibility.

Some projects stop at this stage – in fact, it’s a classic playbook for web2 companies, from Substack to OnlyFans, from YouTube to X/Twitter… Revenue sharing has compelling appeal and obvious scale effects.

But deeper than revenue sharing is the notion that economic ownership better connects users to the long-term success of the platform rather than limiting them to short-term gains. Users with economic ownership will be more invested in how their contributions drive platform growth. This parallels the age-old incentive in Silicon Valley to motivate startup employees.

(3) Allowing advanced users to upgrade to ownership

Finally, the most loyal super users can have ownership by possessing tokens that include economic and governance rights. This conversion is not an automatic and passive process, but rather a choice for the users. For example, the most valuable users, measured by their generated revenue, can choose to receive a share of the earnings in the form of ETH/stablecoin or they can choose to receive a proportional allocation of the project’s native tokens.

When choosing the latter, users are trading a portion of their personal earnings for a portion of the community’s total earnings. If the network grows, the community’s earnings also grow, and the tokens should enable them to participate in proportion. Additionally, the tokens may provide governance over key protocol parameters, such as fees or revenue-sharing variables, to ensure long-term consistency.

There are more implementation details that need to be addressed. (Do users have to stake their tokens to earn platform fees? Should tokens be released on a schedule?) But we won’t go into further discussion, we’ll just give a few hypothetical examples:

Looking back at Zora, so far they have distributed approximately 1008 ETH (close to $2 million) in protocol rewards. These rewards are in a revenue-sharing model and are mainly distributed to NFT creators driving mining activity, as well as developers and curators. In the progressive ownership model, top Zora revenue generators can choose to claim Zora tokens instead of ETH protocol rewards. How many creators and developers would choose to do this? It may only be a small percentage, but these individuals have a significant stake, so they could become more active and motivated to contribute to the network’s growth.

Another hypothetical example is Farcaster, which charges individual users a yearly fee of approximately $7 for storing data on the network. Assuming the protocol shares its revenue with attention-attracting client developers, the developers can choose whether to pass on some of this value to end users, similar to rebates. Alternatively, developers can convert a portion of their revenue share into protocol tokens, allowing them to have exposure to the ecosystem’s growth and governance over key protocol parameters.

4. Web2 Loyalty Model Precedents

The progressive ownership model closely relates to the customer loyalty ladder proposed by business researcher James Heskett, which includes four stages: “loyalty (repeat purchase), commitment (willingness to recommend the product or service to others), apostle-like behavior (willingness to persuade others to use the product or service), and ownership (willingness to recommend improvements to the product or service).”

The progressive ownership model recognizes that customer loyalty needs to deepen the level of psychological ownership. As users upgrade from earnings to tokens, they may feel a growing sense of psychological ownership and eventually shout louder claims—to behave like owners of the product and take on more responsibility for its ongoing success.

This emotional connection can be fostered through financial leverage (revenue-sharing) and product elements (personalized experiences, interactive features, and user input), making users more inclined to become long-term stakeholders.

Using economic ownership to enhance user loyalty is consistent with research in the field of public equity funds, which indicates that stock ownership can increase brand loyalty among existing users. Li wrote:

A study by Columbia Business School found that in a fintech app, users would choose to repurchase certain brands or stores to obtain stocks, resulting in a 40% increase in their weekly spending on these brands… Users intentionally select their stock portfolios and spend time consuming from these brands in order to receive stock rewards.

5. Transitioning to a new era of token distribution

Progressive ownership represents a significant deviation from the previous era of token distribution. Although ICOs and airdrops were primarily used as promotional tools, they often proved ineffective in incentivizing organic users. As a result, entrepreneurs were often led astray and struggled to find product-market fit.

In the progressive ownership model, profit-sharing stimulates growth and strengthens loyalty. Ultimately, users will voluntarily choose ownership, ensuring that only the most loyal users become stakeholders. This paves the way for an advocate community dedicated to the long-term success of the network. While this model may face unforeseen challenges, it aligns well with the precedent of economic ownership improving loyalty.

Another topic is the relationship between progressive ownership and a fully decentralized compliance framework. The industry needs innovative compliance arguments that allow teams to continue building remarkable products while upgrading advanced users to owners through ownership. This is the work we plan to advance in Variant.

The innovation in token distribution models catalyzes new growth and development within the ecosystem, and the script is not yet complete. We are excited to see future iterations of token distribution.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!