The most complete points plan practice guide

Original title: Pointenomics 101: Mastering the New Language of Crypto Incentives

Original author: kenton.eth

Original translation: Ismay, BlockBeats

Editor's note: Points programs have become an important tool for projects to gain user loyalty and drive product growth. The author of this article, Kenton, founder of Sense Finance and former MakerDAO integration engineer, discusses in detail the design, implementation and advantages and disadvantages of points programs in practical applications. From the successful experience of projects such as Ethena, Napier and Blur, we can see that a reasonable points strategy can not only effectively improve the KPI of the project, but also gain an advantage in market competition. However, points programs also face problems such as lack of transparency and user fatigue, and are in urgent need of further innovation and optimization.

A new era of digital loyalty for Web3 is dawning, driven by innovative points systems. Since Blur launched its groundbreaking points program in 2022, teams have rushed to adopt this new incentive primitive and leverage its advantages. With each new points program launched, projects have advanced the field of incentive design, discovering new reward mechanisms and incentivized behaviors. By 2024, a diverse ecosystem of points programs has flourished, with each project adding a unique color to the evolving points metaverse. This rapid evolution has created a colorful array of reward mechanisms and targeted behaviors, providing unprecedented opportunities for user activation and retention. However, for new builders, navigating the complexity of "point economics" can be daunting. This is about to change.

Through conversations with points issuers and analysis of more than 20 points programs, this guide reveals the benefits, criticisms, and practical applications of point economics for both new and old points issuers.

Part I provides an introduction to points, while Part II provides a comprehensive overview of point economics in Web3.

Ready to upgrade your incentive program? Let’s dive in.

Part I: Getting Started with Points

What are points?

At its core, a point is a digital reward unit whose value is reflected in its utility or convertibility into a tangible benefit — whether that’s exclusive access, product discounts, or direct monetary value. Projects strategically deploy points programs not only to foster loyalty, but also to drive product adoption, amplify network effects, and shape user behavior by accelerating product growth.

Why do points matter?

Points programs create a mutually beneficial relationship between brands and users. Companies gain loyalty, growth, and data, while users are rewarded for repeat usage. Well-designed points programs help drive long-term engagement and deepen emotional connections, both of which are critical to product defensibility.

Generally speaking, both Web2 and Web3 companies/projects can benefit from points programs in the following ways:

Marketing - When combined with referral programs, points can expand the marketing funnel.

Growth - Because points provide value, they reduce the effective price of the product/service, allowing points programs to increase conversion rates within the marketing funnel, driving growth in core KPIs such as the number of active users.

Sticky/Loyalty - Points programs can increase the stickiness of a product, thereby increasing the lifetime value (LTV) of a user and reducing churn. Studies show that loyal members spend 27% more on average, so product stickiness is achieved when the average LTV exceeds the cost of a loyal member.

Market Timing - Dynamic points programs can help products with network effects, such as social media platforms and financial markets, get off the ground. By rewarding early adopters, companies can improve the user experience (UX) of the product until critical mass is reached.

Users can also find value in points programs in the following ways:

Incentive value - This value can come in the form of discounts, free products, exclusive access and benefits, and currency.

Brand identification - Effective loyalty programs go beyond transactional rewards and make customers feel valued and emotionally connected to the brand. The pinnacle of loyalty is when customers develop a psychological sense of ownership over the brand.

Part II: The Points Economics of the Protocol

Traditional Points Programs

While points programs have existed in Web2 for decades, their adoption in Web3 introduces new dynamics and opportunities. In Web2, we are familiar with airline loyalty programs, such as Delta’s SkyMiles, and credit card rewards programs, such as Chase Ultimate Rewards. These programs have successfully driven customer retention and spending, and are worth billions of dollars each year - sometimes the loyalty program generates more revenue than the company’s core business! However, Web3 takes the concept of points to a new level.

Web3 Points Revolution

The first project to introduce points in Web3 was Blur, which set off a flurry of reactions in the crypto space in 2022. Many projects followed suit, some reaching impressive scale.

For example, Eigenlayer’s points program issues $1.8 billion worth of points per year, with a 10% annualized rate of return (APR) on its $1.8 billion total value locked (TVL). Other notable projects include Ethena, LRT programs (EtherFi, Swell, Kelp), and Blast.

Unique Advantages of Web3 Projects

In addition to the regular benefits, Web3 projects can also gain the following unique advantages from points programs:

Incentives at launch - Projects can launch points programs faster than tokens. This enables projects to offer user incentives immediately, driving growth from the start. Tokens, on the other hand, require careful design, allocation planning, and timing considerations, which can be difficult to prioritize during protocol launch. Tokens are products in themselves and should not be launched hastily.

Token Conversion Potential - Points can be designed to be potentially convertible to tokens in the future, which increases their implied monetary value. This allows teams to effectively "borrow" liquidity from future Token Generation Events (TGEs) to fund current incentives.

Increased Flexibility - Points programs give teams the flexibility to adjust their TGE schedules, airdrop allocations, and incentive structures without hindering growth. This flexibility enables more effective Go-to-Market (GTM) strategies. Additionally, unlike governance-approved incentive programs, teams are free to adjust point programs. While token governance is the ideal end goal, in the early stages, a team's flexibility can be a competitive advantage.

Market Timing - Token launches tend to perform better in bull markets. Points programs allow projects to build momentum and community during bear markets, setting them up for a successful token launch when market conditions improve.

It’s worth noting that these benefits aren’t limited to the pre-TGE situation. Projects like Ethena and EtherFi have seen similar benefits from their second season points programs even after their token launch.

Points Program Design

Points programs in Web3 have evolved to include a variety of complex mechanisms, many of which are used in combination. The most effective programs include behavioral, base, and boost, with some also beginning to experiment with program rewards. Let’s take a deeper look at each of these.

Planned Behaviors

Planned Behaviors detail user behaviors and actions for earning points, such as depositing on L2 or trading on a new AMM. Includes:

Holding unlocked assets - assets that users can deposit and withdraw freely (such as LRTs, Pendle YTs, Ethena sUSDe collateral deposits on Morpho)

Holding locked assets - assets that users need to wait for a period of time before withdrawing (such as locked Ethena USDe, local re-staking on Eigenlayer, Karak and Symbiotic)

Providing liquidity - similar to unlocked assets, but with the risk of passively selling deposited assets (such as Thruster LP positions staked in Hyperlock)

Social interactions - likes, reposts, comments and follows

Program Basics

The program basics include the most important details of the points program, such as the points issuance schedule, timeline and airdrop size. In most cases, points programs are divided into multiple seasons, each of which is usually 3-6 months long, with unique base terms for each season.

1. Distribution schedule - how often points holders receive points, and how many points they receive

· One-time rewards

A one-time allocation of points for a specific action. Used for initiating actions and marketing. For example, Blur's one-time reward for listing an NFT within 14 days, Lyra's one-time reward for participating in Twitter/X-space events, and Napier's rewards for social interactions and referrals.

· Ongoing rewards

Fixed supply distribution - the total supply of points for the entire program (such as Hyperliquid) or within a phase/season (such as Morpho*) is fixed. While both reduce user dilution, fixed program supply has the least uncertainty, while fixed phase supply allows teams to arrange distribution schedules more flexibly. Teams often use a fixed supply emission basis to provide additional security for users.

Variable emission - (e.g. Eigenlayer, all major LRTs, Ethena, etc.). Total supply is variable and is a function of TVL. Variable emission schedules dynamically dilute early depositors by accumulating a certain number of points per USD or ETH participated per day. While the expected airdrop payout (in USD) attracts new deposits, users who wish to eliminate dilution must increase participation in tandem with total deposits. Teams like this emission schedule because it removes the operational complexity of ensuring a fair distribution of points for all participants. To reduce dilution for the earliest users and increase urgency, teams release a decreasing accumulation rate schedule (e.g. 25 points per day in July, 20 points per day in August, etc.).

2. Time - How long points are awarded

· Clear vs. vague - Most projects give a fixed point program/season duration (e.g. 6 months), but some give a range (e.g. 3-6 months). Teams that want extra flexibility will choose a vague timeline, even though this may hinder growth.

· Conditional - Some programs/seasons are designed to end early when key milestones are reached. If the expected season airdrop allocation is fixed, this can increase the sense of urgency to participate. For example, Ethena had a milestone of $1 billion TVL in Season 1 - a goal that was exceeded in seven weeks.

* Although Morpho distributes non-transferable $MOPRHO tokens as incentives, it operates similarly to a point issuer.

Programmed Boost

Programmed Boost is the first lever for team adjustments, designed to reward users with a higher relative share of points through specific, targeted behaviors. Here is a list of different boost mechanisms:

Service Quality Boost - Projects can improve the quality of the product for one user group (e.g., traders) by incentivizing the "quality of service" of another user group (e.g., liquidity providers). For systems where users can differentiate on "service", such as Univ3 pools, projects can allocate points based on users' contribution to the product user experience (e.g., liquidity). Examples include Blur, which rewards LPs for quoting closer to the NFT floor price, and Merkl, whose incentive mechanism favors Univ3 LPs who make competitive quotes and earn more trading fees.

Referral - Refer others and earn a portion of their points (e.g., 10%). This helps with marketing and incentivizing the acquisition of whale/high-volume users. There is a risk of referrals through your own address. Some projects will ask for a referral code to access the app, generating additional marketing buzz, albeit with a reduced conversion rate to usage. Examples include Ethena and Blackbird.

Tiered Referral Boost - An extension of the simple referral system. Users can earn not only their referrer's share of points (i.e. level 1), but also their referrer's share of points (i.e. level 2). The goal is to encourage users to refer people who are expected to actively refer others. There is a risk of referrals being made through your own address. Examples include Blur and Blast.

Base Boost - Projects can add an amplification boost to attract and cultivate mass adopters. The basic idea is that your base point accumulation rate increases with base usage, thereby earning rewards faster for the same usage. Non-mass adopters will be undervalued and difficult to attract. For example, Aevo has a base volume boost for traders.

Market Launch Boost - Projects will use launch boosts to attract liquidity and launch new markets before network effects kick in. Launch boosts typically have an expiration time, but other thresholds can be explored. For example, some LRT projects (like EtherFi) use a two-week 2x launch boost every time a new Pendle market launches.

Loyalty Boost - Give extra points to users who pledge loyalty to a product (i.e., prove to use product A instead of B). This is particularly effective for products that rely on network effects; as competitors' networks shrink, the product's relative value proposition gets an extra boost. Blur used this boost to quickly attract market share from OpenSea after launch. This boost is more effective for NFTs, as their scarcity, especially when owners of a collectible typically only own one unit, forces them to choose loyalty; however, with fungible tokens, users can spread their balances across multiple addresses to avoid unnecessary pressure.

Randomized Reward Boosts - Taking inspiration from Skinner Box experiments, some projects use uncertainty in reward size or timing to attract more engagement and attention. Blur's package reward system uses loyalty points to determine the rarity *luck* of when to distribute packages. While users don't know the absolute reward size, they know the relative amounts of each package. Similarly, Aevo uses a "lucky" volume boost system, where any trade by a user has a chance to receive a volume boost, increasing the reward for that trade; both projects use a tiered boost system, where the highest boost is the least frequent (e.g., 1% chance of receiving a 25x boost).

Leaderboard Boosts - To encourage competition between users, projects have created leadership boosts for the top 100 point earners. This concentrates point ownership among the top users, but can result in higher absolute KPIs as users compete to get higher rankings. Although not widely publicized, Blur used this boost in Season 3.

Native Token Lockup Boost - Projects with existing native tokens will offer boosts to points earners who demonstrate long-term belief. Because this may reduce circulating supply, teams should expect increased volatility in their tokens. Examples include Ethena's $ENA and Safe's $SAFE.

TVL Boost - Projects can incentivize user advocacy and marketing with points boosts based on TVL growth. Examples include 3Jane, whose AMPL-style points program rebases point ownership by TVL, and Overload, which promises increasing airdrop allocations when certain TVL milestones are reached.

Group boost - Incentivizes social pressure and coordination to get group boost. AnimeChain was the first project to try this approach, using Squads as groups that share boosts.

Locked boost - In addition to a decaying schedule that rewards past stickiness, some projects are beginning to experiment with boosts that reward future stickiness. Examples include EtherFi's 1-2x boost to StakeRank in Season 2 and Hourglass's 1-4x boost to liquidity locks for different maturities.

Scheduled Rewards

Finally, scheduled rewards are other immediate benefits beyond the anticipation of airdrops. The speculative nature of future airdrops drives most demand for points, but some projects are trying to provide additional utility to point holders, such as Rainbow Wallet's ETH dividends for point holders.

While this component is small at the moment, I believe more teams will experiment with points holder rewards, drawing inspiration from Web2 mechanisms such as product fee discounts, event access, and other benefits.

Putting it all together

The diversity of these building blocks allows for creativity in points program design. Once a team has identified its goals (user acquisition, product improvement, marketing, etc.), it can combine multiple building blocks in sequence or in parallel for maximum effect. Here are some examples of creative use cases that go beyond the traditional “deposit here” points strategy to increase total value locked (TVL):

Ethena’s strategy is to issue points to USDe holders and increase yield for sUSDe holders.

Napier’s strategy is to incentivize social interactions and asset holders of other projects to increase partnerships and expand marketing reach.

Blur’s market entry strategy utilized various points mechanisms across multiple airdrops to quickly build supply and demand in the NFT market space and quickly gain market share upon public launch. Using random boost packages, their high-level strategy is as follows:

User Acquisition - Airdrop 0 rewards private beta testers to attract the most active NFT traders.

Start Supply - Airdrop 1 rewards new listings from existing NFT traders.

Build Supply from Loyal Users - Airdrop 2 was larger than Airdrop 1, rewarding more listings and giving boosts to loyal listers who migrated liquidity from other NFT markets.

Stimulating Demand - Airdrop 3 rewards competitive bids to incentivize trading volume.

After a project designs its points program and go-to-market strategy, it will turn its attention to program implementation. Points accumulation calculations, data pipelines, price feeds, and points data storage are all components of the points program backend. Once the backend is complete, projects will focus on consumer-facing implementation, typically a public dashboard that displays user points balances and points leaderboards. Many projects build their implementation from scratch, but some outsource the work to development shops and other infrastructure providers.

Next, when a project is ready for its Token Generation Event (TGE) and first airdrop, they will explore ways to distribute tokens to their points holders. While airdrop mechanics are not covered in this post, teams should consider airdrop tokens vs. options, fixed vs. dynamic allocations, linear vs. non-linear distributions, vesting, lock-ups, Sybil prevention, and allocation implementation. Those interested in learning more can refer to this post to get up to speed.

Criticisms and Shortcomings of Points Programs

While points programs have proven their effectiveness, they are not without criticism. Points programs are entirely centralized incentive mechanisms. Points accumulation calculations, data storage, program schedules, and criteria are often opaque to users and are usually kept in off-chain databases. Therefore, point issuers must prioritize transparency as much as possible to build trust with their user base. If users cannot trust the terms of the points program, they will not value the points and will rush to chase rewards.

While pre-TGE teams generally cannot disclose upcoming airdrops or allocations to points holders for legal reasons, they can invest in concise communication, timely disclosure of program adjustments, and rapid fixes when errors occur; EtherFi sets a good example in handling calculation errors.

Other public criticisms, such as ungenerous allocations to points holders and airdrop allocations that are vulnerable to Sybil attacks, effectively unfairly blame the points program when it is actually the airdrop program's fault. Points are simply a precise way of incentivizing and recording the "share of points" a user owns. The airdrop terms determine how, when, and what kind of compensation points holders get.

As we saw with Eigenlayer, users were not unhappy with their points balances. What they were unhappy about was the amount of airdrops their points converted to and the undisclosed claiming criteria. After 11 months of deposits, point holders only received 5% of the TGE, and they felt like they were being "farmed" and received returns far below the market average at the time. In addition, many point holders were unexpectedly geo-blocked and unable to claim their $EIGEN share. Although the team has full discretion over token distribution, they could have easily avoided the latter issue by geo-blocking the product beforehand. The same is true for Blast - users were not unhappy with their points balances. Blast airdropped 7% to point holders and required the first 1,000 wallets to partially lock up for 6 months. For a plan of less than 6 months, this is pretty consistent with other airdrop seasons (such as Ethena, EtherFi, etc.).

In summary, the effectiveness of point programs has been proven, but there are also problems such as centralization and lack of transparency. Point issuers should attach importance to transparency construction and properly handle airdrop programs and legal compliance issues to maximize user trust and participation.

Although not a criticism of the design of the program, point fatigue is becoming a growing problem in the ecosystem, as seen in public forums and private discussions with DeFi whales. Understanding the value of a point takes time and effort. For each new program, users need to build an initial model and constantly update their assumptions to ensure that they get the best return on their capital or behavior. As new point programs flood the ecosystem, users find it difficult to keep up, resulting in fatigue and slow migration between point programs. For example, suppose you have two options: 1,000 units of points A per day vs. 2 million units of points B per day - which one is more valuable? Is the more valuable one valuable enough to be worth risking capital? The answer is not immediately obvious. Projects that cannot immediately distinguish their point programs from all other programs will have weaker points.

The last important and rather insidious side effect of points systems is that they tend to mask product-market fit (PMF). Points are great launch mechanisms, but they have the potential to hide the organic interest that is critical to finding PMF. Even after validating PMF, teams need to build enough organic traction to find sustainability for their product/service before tightening incentives. Mason Nystrom of Variant calls this the “hot launch problem.” For teams that haven’t validated PMF yet, I recommend introducing points after validating PMF in a closed beta program. For teams that have already validated PMF, the situation is a little more complicated, but Mason recommends teams “take extra steps to ensure token rewards are used for organic usage and drive important metrics like engagement and retention.”

To summarize, while points programs work well in the launch phase, teams should be mindful of transparency issues, points fatigue, and masking of product-market fit. Through timely communication, the right incentives, and ensuring organic user engagement, teams can maximize the effectiveness of points programs while avoiding potential negative effects.

Future Outlook

Looking forward, I expect points programs to evolve to address the most pressing issues, such as program transparency and points fatigue.

To increase transparency into total points supply, allocation logic, and accumulation history, future points programs, or portions of them, will exist on-chain. Examples of on-chain points implementations include 3Jane’s AMPLOL and Frax’s FXLT Points. Another points software provider is Stack, building infrastructure to manage on-chain points programs.

Addressing points fatigue is a more complex challenge. While differentiating program designs is often discussed in private chats and on social media, the key to reducing fatigue may lie in enabling users to quickly and confidently assess the value of their points. This capability would significantly simplify comparisons between various points opportunities, making participation decisions more straightforward and less overwhelming. While not part of the design of points programs, secondary markets such as Whales Market can help users price points and reduce fatigue, although their liquidity is not sufficient to support most points exit strategies. However, as these markets mature, they may become indispensable in price discovery, providing exit strategies, and creating a more dynamic points economy.

Overall, future points programs will strive for greater transparency and user-friendliness, addressing the main challenges currently faced through on-chain implementation and the development of secondary markets.

Conclusion

Points have become a powerful tool in the Web3 ecosystem, bringing benefits beyond traditional loyalty programs. They enable projects to reward loyal core users, kick-start network effects, and fine-tune their go-to-market strategies in a more predictable manner. This leads to more efficient product development and, ultimately, value creation for end users.

As this space matures, I expect to see further innovation in the design and implementation of points programs. The key to success will be balancing transparency and flexibility, and aligning points programs closely with overall project goals and user needs.

For builders and projects in the Web3 space, understanding and harnessing the power of well-designed points programs may be a critical factor in achieving sustainable growth. As we move forward, points are likely to continue to be a fundamental component of crypto incentive structures, continuing to shape the landscape of DeFi and beyond.

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