Variant联创Li Jin From PoW, ICO, and Airdrops to Progressive Ownership Token Distribution

Innovative Creation Li Jin's Journey from PoW, ICO and Airdrops to Progressive Ownership Token Distribution

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

The theory behind Variant, which we founded, is that the next generation of the internet will transform users into owners through tokenization. Using tokens as user incentives has had a great bootstrapping effect on infrastructure networks like Bitcoin and Ethereum. However, there hasn’t been a proven model at the application layer for using tokens to scale networks. Instead, there are many examples that show token distribution actually hinders sustained growth and retention because there are more speculators attracted to tokens than actual users, blurring product-market fit.

These mistakes have led many to believe that using tokens in applications is universally wrong, but we don’t agree. We believe the way forward is to continuously iterate on token design, moving towards a more bottom-up and optional ownership distribution model, which we call “progressive ownership”. The focus of this approach is to make users more loyal to applications that have product-market fit.

In this framework, we will summarize the past epochs of token distribution mechanisms – PoW mining, ICOs, and airdrops – as well as their main lessons and issues. Then, we will propose high-level measures and strategies for a new token distribution model that we believe can sustain applications with early product-market fit. By employing this strategy, applications can deepen loyalty from existing users using ownership, paving the way for further user growth and retention.

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1、The Three Epochs of Token Distribution

Cryptocurrencies have gone through three major epochs of token distribution:

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

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

• The Airdrop Era (2020-2023) – Guiding usage

Each epoch has expanded access and lowered entry barriers, resulting in a natural wave of growth and development.

(1) PoW Era (2009-present)

Bitcoin introduced the idea that anyone willing to run software on their own machine (“mining”) can operate an permissionless network to earn tokens representing ownership of the network. Miners who invest more computational power have a higher chance of receiving rewards, leading to the rise of professionalism and significant investments in computational resources.

The PoW era demonstrated that token incentives can effectively guide supply in networks where the value of contributions can be quantified. The key difference between capital assets (hardware) and financial assets (BTC) is that miners have to sell financial assets to pay for the cost of capital assets. As specialized hardware became an essential cost, miners had to invest more stake in the game, but this dynamic development also pushed out ordinary users.

(2) ICO Era (2014-2018)

The ICO (Initial Coin Offering) era clearly marked a divergence from the PoW token distribution model: projects raised funds and distributed tokens by directly selling them to potential users. In theory, this approach allowed projects to bypass intermediaries like venture capitalists and banks, reaching a wider range of participants who could share in the benefits of the products and services they would be using.

This model attracted entrepreneurs and investors, sparking a wave of speculation. In 2014, Ethereum partially launched through an ICO, becoming a blueprint for numerous projects in the following years, including major ICOs like EOS and Bancor in 2017-2018. However, the ICO era was plagued with fraud and theft and lacked accountability. The failures of many ICO projects, combined with stringent regulatory scrutiny, led to the rapid decline of this era.

ICOs highlighted the potential of blockchain in global capital formation without the need for permission. But this era also underscored the need for more thoughtful token design and distribution models that prioritize community coordination and long-term development, rather than solely focusing on capital supply.

(3) Airdrop Era (2020-2023)

In 2018, a Securities and Exchange Commission (SEC) official in the United States stated that BTC and ETH are not securities because they are “sufficiently decentralized.” In response, many projects designed tokens with governance rights and distributed them widely to users retroactively, aiming for full decentralization.

Different from ICOs, which involved monetary investments in token distribution, airdrops rewarded 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 gains).

Although airdrops represented a shift towards ownership distribution models centered on users and communities, users hardly needed to invest, and most airdrop recipients immediately sold the majority of the tokens they received, converting ownership into profits.

Many projects used airdrops before establishing a genuine product-market fit. The tokens attracted both bots and incentive-driven speculative users, bypassing those users aligned with the project’s long-term success. The frenzy of grabbing airdrops and selling tokens blurred signals of product-market fit, leading to price booms and slumps.

Some projects hastily launched tokens and then saw their founding teams take a step back, attempting to comply with a vaguely defined test for full decentralization. This left decision-making in the hands of governance voting, where most token holders lacked the time or background knowledge to fully understand everything. Even before, or after, the product meets market demand, founders need to continue iterating rapidly. It turns out that airdrop outcomes often don’t align with the growth strategies and institutional execution of startups.

We believe that the main lesson of the airdrop era is that the pursuit of full decentralization has led many projects to deviate from the market fit. Instead, after early market fit is validated, token distribution should be more carefully targeted towards advanced users.

2. A new token distribution framework: Progressive Ownership

Progressive ownership is built on a progressive decentralization, which means that tokens cannot replace market fit. This approach uses economic incentives to increase user loyalty and retention to gradually strengthen user ownership. In this model, users are incentivized with profit-sharing (such as ETH or stablecoins), but users can also choose to convert personal income into ownership tokens representing a certain percentage of community income.

This is beneficial to 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 level of risk and participation according to their own circumstances in economic participation.

There are advantages for builders as well. They can leverage profit-sharing incentives to drive growth, establish loyalty, retain control, and iterate quickly without being distracted by the goal of full decentralization. In addition, founders can still strive for liquidity through tokens while attempting to mitigate risks associated with widespread distribution without targeting.

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

Progressive ownership shifts token distribution from opt-out to opt-in mode, which can potentially promote stronger loyalty and network effects as users have more vested interest. When loyal users upgrade to owners, their interests are more aligned with the success of the network, which also motivates them to encourage others to join, creating a virtuous cycle of growth. Users or developers who choose ownership are more likely to maintain a long-term relationship with the project, similar to startup employees with stock options.

In contrast, in the airdrop model, loyalty may be eroded as most users choose to sell the tokens for profit, causing downward pressure on the price. Research shows that when customers as stakeholders suffer losses, their satisfaction and loyalty to the company decrease. By opting for an ownership model, the network can alleviate these cycles of boom and bust, as well as the erosion of user interests that come with it.

3 Progressive Ownership

Progressive ownership consists of 3 steps:

• Build a product that meets user needs.

• Use on-chain revenue sharing models to drive growth, retention, and defense capabilities.

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

(1) Build a product that meets user needs

This is the most difficult step. The foundation of the progressive ownership model lies in developing products and services that serve users in a novel way. As Li recently wrote, “Successful startups present incremental improvements in helping people meet core needs.”

By meeting these needs, both in terms of revenue and respect, applications can find product-market fit and even foster psychological ownership.

(2) Use on-chain revenue sharing models to drive growth, retention, and defense capabilities.

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 reward protocol, which distributes a portion of the revenue to the creators and developers driving NFT minting. This approach not only encourages user retention but also enhances defense capabilities.

Some projects stop here— in fact, this is the typical playbook for web2 companies, from Substack to OnlyFans, from YouTube to X/Twitter… Revenue sharing has proven to be highly attractive and has obvious economies of scale.

But deeper than revenue sharing, economic ownership better ties users to the long-term success of the platform, rather than limiting them to short-term revenue. Users with economic ownership will be more attentive to how their contributions drive platform growth. This mirrors the old tricks in Silicon Valley that motivate startup employees.

(3) Allow advanced users to upgrade to ownership

Finally, the most loyal super-users can have ownership through tokens that include economic and governance rights. This transition is not automatic or passive; it is the user’s choice. For example, the most valuable users, measured by generated revenue, can choose to receive a share of the revenue in ETH/stablecoin or opt for a proportional distribution of the project’s native tokens.

By choosing the latter, users are exchanging a portion of their personal revenue for a part of the community’s total revenue. If the network grows, the community’s revenue will also grow, and tokens should enable them to participate proportionally. Additionally, 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 predetermined schedule?) But we won’t go into further discussion; we’ll just provide a few hypothetical examples:

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

Another hypothetical example is Farcaster, which charges individual users an annual fee of approximately $7 to store data on the network. Assuming the protocol shares revenue with client developers who attract attention, developers can choose whether to pass on this value to end-users, similar to a rebate. Alternatively, developers can convert a portion of their revenue share into protocol tokens, allowing them to have exposure to the growth of the ecosystem and governance over key protocol parameters.

4, Web2 Loyalty Model Precedents

The progressive ownership model closely aligns with 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 psychological sense of ownership. As users transition from earnings to tokens, they may feel a higher level of psychological ownership, eventually proclaiming louder claims to the product and taking more responsibility for its continued success.

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

Using economic ownership to strengthen customer loyalty also aligns with research in the public equity fund field, which suggests that stock ownership can increase brand loyalty among existing users. Li writes:

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

5, Transitioning to a New Era of Token Distribution

The progressive ownership model represents a significant departure from the previous era of token distribution. While ICOs and airdrops were primarily used as incentive tools, they often proved ineffective in incentivizing organic users. As a result, entrepreneurs often went astray and struggled to find product-market fit.

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

The relationship between progressive ownership and a fully decentralized compliance framework is another topic. The industry needs novel compliance justifications that allow teams to continue building incredible products while upgrading advanced users to owners through ownership. This is the work we plan to advance at Variant.

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

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