The double-edged sword of token launch: premature token launch can be a mistake, but it can also have an incentive effect

author:MASON NYSTROM

Compiled by: Xiaobai Navigation coderworld

It has been proven that when tokens (or token promises) are combined with new innovative products, they can effectively alleviate the cold start problem. But while speculation can bring benefits to network activity, it can also bring negative effects of short-term liquidity and non-organic users.

Marketplaces and networks that launch tokens from the outset (or before sufficient organic demand is built) must find product-market fit (PMF) within a shortened window, or they will run out of precious token resources.

My friend and investor Tina Call it the “hot start problem,” where the existence of tokens limits the window of time in which startups can find PMF and gain enough organic traction to retain users and liquidity when token rewards are reduced.

Applications released with a points system also suffer from the warm start problem because users now have an implicitTokenexpectations.

I really like the term “hot start problem” because one of the core differences of Crypto compared to Web2 is the ability to use tokens as financial incentives to launch new networks.

This strategy has proven to be effective, especially in markets such as MakerDAO, DyDx, Lido, GMX and other DeFi protocols. Token launch has also been proven to be effective for other Crypto networks, from decentralized IoT networks (such as Helium) to infrastructure (such as Layer 1 Blockchain) and certain middleware (such as oracles). However, networks that choose to scale quickly through tokens and face the hot start problem face several trade-offs, including blurring natural traction and PMF, running out of token resources prematurely, and DAO Governance (such as fundraising, governance decisions, etc.) increases the complexity of operational tasks.

Why choose the hot start problem?

There are two situations where the warm start problem is more favorable than the cold start problem:

• Startups competing in a highly competitive, red ocean market with known demand

• Products and networks with passive supply-side participation

Red Sea Market

The core disadvantage of the hot start problem is that it is difficult to judge natural demand, but this problem is alleviated in categories with strong product market fit (PMF). In this case, latecomers may be able to successfully challenge the early movers by launching tokens early. The DeFi field provides many examples of latecomers overcoming the hot start problem by effectively using tokens to launch new protocols. Although Bitmex and Perpetual Protocol were the first to provide perpetualcontractCentralization and decentralizationexchange, but later GMX and dYdX quickly increased liquidity through Tokens,becomeSustainabilitycontractMarket leader. Newer DeFi protocols such as Morpho and Spark are leading in lendingsuccessLaunched with billions of dollars in total locked value (TVL), Aave (formerly ETHlend) still dominates despite early movers such as Compound. Today, tokens (and credits) are the default choice for liquidity launch when the need for new protocols is clear. For example, liquidity staking protocols actively use credits and tokens to increase liquidity in a highly competitive market.

In the consumer crypto space, Blur has demonstrated a strategy to compete in a crowded market, with its market-defining points system and token launch, making Blur the largest cryptocurrency exchange in terms of transaction volume.leadingEthereum NFT trading venue.

Passive and active supply involvement

Compared with the active provisioning network, the hot start problem isPassive supply networkEasier to overcome. A brief history of token economics shows that tokens are useful in launching a network when there are passive tasks to be accomplished, such as staking, providing liquidity, listing assets (like NFTs), or set-and-forget hardware (like DePIN).

On the contrary, although Token is launching active networks such as Axie, Braintrust, Prime, YGG and SteXiaobai NavigationPN has also been successful, but the premature appearance of tokens often obscures the true product-market fit.The warm start problem is more challenging in active networks than in passive networks.

The lesson here is not that tokens are ineffective in active networks, but that applications and marketplaces that launch token rewards for completing active tasks (such as usage, games, gigs, services, etc.) must take additional measures to ensure that token rewards are used for organic usage and drive important metrics such as engagement and retention. For example, the data annotation network Sapien gamifies the annotation task and lets users stake points to earn more points. In this case, users passively staking when performing certain actions may serve as a loss aversion mechanism to ensure that participants provide higher quality data annotations.

Speculation: Feature or Bug?

Speculation is a double-edged sword. If integrated early in the product lifecycle, it can be a flaw, but if done strategically, it can also be a powerful feature and growth tool for attracting user attention.

Rather than solving the cold start problem, startups that choose to launch tokens before gaining natural traction choose the hot start problem. They accept the tradeoff of using tokens as an external incentive to attract user attention while betting on their ability to discover or create natural product utility amidst the increasing speculative noise.

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