<aside> 💡 Along with utility, rewards are responsible for maintaining market value and community interest. For new projects the latter is especially important, as they need enough adoption to scale and compound its benefits. However, communities encountered fundamental problems that didn’t allow for sustainability.
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Reward-centered projects have been on the rise since the inception of decentralized finance (DeFi). The logic was straightforward: if a token can passively generate value on its own, it should reduce selling pressure and even encourage buying, resulting in consistently higher prices as more members join.
But the reality wasn’t that simple. There are three critical components that their business models had overlooked.
The earliest decentralized applications generated value through different means:
This is because until recently, there was no reliable means to bridge real-world assets with blockchain technology. This synergy is essential as most people in crypto are not interested in asset tokenization unless it allows for exponential yield potential, which on its own it cannot.
In the end, both methods were insufficient to sustain value because of heavy market dependency. Unfavorable market conditions would devalue the tokens’ worth of revenue and drive away Web3 users, rendering supply incentives useless.
A major contributor to this market dependency was the community composition itself: Web3 users. The lack of tangible rewards, abstract value generation, and complexity would deter the mainstream audience from exploring these projects. Even if the promotion succeeded, this real-world disconnection would lead most new “adopters” to sell without a second thought.
Due to early challenges in linking Web3 to real-world use cases, a lot of projects switched focus to virtual rewards instead: non-fungible tokens (NFTs), play-to-earn games (P2E), and software-as-a-service models beyond finance. And while this utility helped to better back the value of those projects, the rewards problem remained, meaning that the investment of their “community” was still at the mercy of Bitcoin.
The lack of real value, tangible rewards, or both can be summarized as ponzinomics by default. Without real value generation, it becomes challenging to offer tangible rewards and appeal to the mass audience—let alone sustainably—resulting in a fragile community and project valuation that’s constantly at risk of implosion.
Until this problem becomes evident or solved, users will typically stay just for the promise of future rewards.
Fortunately, all these misses contributed to a more experienced, favorable industry. The blockchain space is more transparent, better regulated, and less volatile than ever before. Institutional investors are rallying to Web3, mainly being led by Real Yield and Real-World Assets. Thanks to Web3 projects tokenizing real-life assets, the blockchain and the real world can finally be bridged.
Asset tokenization can generate annual savings of $20 billion in just the global clearing and settlement costs. By 2030, it could unlock a $16 trillion global market for tokenized illiquid assets, accounting for less than two percent of the total notional value of public and private assets.
Boston Consulting Group